Razor and blades business model
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The razor and blades business model (also called the "bait and hook model" or the "tied products model") works by selling a "master" product at a subsidised price, and making the profit on high margin "consumables" that are essential to the use of the master product. The master product may actually be sold at a loss, in order to "capture" the customer into using the consumable product.
In effect, this is the same as offering a high-interest loan to the customer to offset the price of the master product, which is to be paid off in installments as they use the consumables.
This business model can be dated to King C. Gillette, who used it for his sales of razor handles and disposable razor blades. This business model continues to be used in the disposable razor blade business to this day. In 2004, The Gillette Company expanded this business model with the M3Power, a vibrating safety razor with both replaceable blades and batteries. Gillette owns the Duracell battery brand, allowing them to make money selling not only blades but also replacement batteries.
This model may be threatened if the price of the high margin consumables is in question. For example, computer printer manufacturers have gone through extensive efforts to make sure that inkjet printers are not compatible with cheaper aftermarket ink cartridges, such as designing the cartridges in a way that makes it possible to patent certain parts or aspects, or invoking the Digital Millennium Copyright Act. In Lexmark v. Static Control the U.S. Supreme Court ruled that circumvention of Lexmark's ink cartridge lock does not violate the DMCA. On the other hand, in August 2005, Lexmark won a case in the U.S. that allows them to sue certain large customers for violating their boxwrap license.
Consumers may also find other uses for the subsidized product rather than utilize it for the company's intended purpose, which adversely affects revenue streams. This has happened to "free" personal computers with expensive proprietary Internet services and contributed to the failure of the CueCat barcode scanner.
In markets where all the major competitors follow this business model, there may be suspicions of the existence of cartels and violation of antitrust legislation. In some cases, notably auto parts in the United States, legislation exists specifically to prevent this business model from existing.
Examples include
- electric toothbrushes and their brushheads
- computer printers and their ink cartridges
- games consoles and the games they play, as well as their peripherals, particularly with the recent Xbox 360
- cell phones and air time costs
- inexpensive cameras and prints
- satellite tv dishes/installation and subscription costs
- floor cleaning mops with disposable pads
- blood glucose meters and costly single-use test strips