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Give 'em the razor, sell 'em the blades!

Tuesday, 4 March 2014 | By Taskmaster

Recently, Old Taskmaster looked at freemium pricing as a possible pricing model for your business. In short, the idea is you give away part of your product for free, with the expectation you will persuade your customer to purchase a value added extra.

 

For example, you might have heard the phrase “there’s no such thing as a free lunch”. It comes from a practice in New Orleans during the 1970s of offering customers a free counter meal item with any drink they purchased.

 

While the drinks did not cover the cost of the meal, the saloons prospered on the fact that customers would purchase two or three drinks at inflated prices with their meal, more than covering their meal cost. For the publicans, as in life, there indeed was no such thing as a free lunch.

 

Of course, while it might be feasible to give a customer a free counter meal, what if your product is too expensive to viably give away for free? What if your margins are already razor-thin?

 

This is when we start talking about razors and blades.

 

In 1901, an entrepreneur named King Gillette from Fond du Lac in Wisconsin noticed most barbers used razors with large, bolted-on blades. They had been nicknamed “cut-throat razors” for their propensity to wound the customers of a barber with a less-than-steady hand. And just think, you say you work in a “cut-throat” industry! Cowards!

 

Anyway, while the handles remained sturdy, the blades quickly dulled, requiring regular sharpening. Being the entrepreneurial sort, King Gillette developed a new type of razor. These featured a razor handle with an easily replaced blade.

 

Far more revolutionary than his blade design, however, was the design of his pricing structure. Gillette sold his handles at a significant loss in order to secure as many customers as possible.

 

Where Gillette made his money was in the sale of blades, which were sold at a significant premium. By purchasing the handle, customers were effectively locked into purchasing several blades, which more than covered the subsidy on the handle.

 

Today, Gillette’s razor and blade pricing model today is applied to a number of industries.

 

For example, that cheap little ink-jet printer on your office desk was sold to you at a considerable subsidy, like a razor handle. The ink cartridges it uses, like Gillette’s blades, are sold at a significant premium. Once you’ve printed a few documents with ink more expensive per litre than crude oil, it turns out the total cost of ownership is higher than you anticipated.

 

Likewise, it’s not feasible to give away plane tickets for free. However, low-cost carriers sell tickets on the cheap in the hope you’ll pay a premium for using a credit card, having extra baggage or enjoying an in-flight meal.

 

Similarly, your kids’ PlayStation or Xbox is, at its core, a computer powerful enough to play graphics processor-intensive games. It’s also sold to you at a subsidised price – but Sony or Microsoft extract a licensing fee for every game they sell.

 

Optus will sell you an $899 Samsung Galaxy S4 smartphone for just $17 a month for 24 months, or $408. Oh, but you’ll also need a $50 per month plan, which means it’ll cost you a total of $1608 by the time 24 months are up – nearly double the cost of the phone.

 

And the cinema sells you tickets for roughly the extortionate price the Hollywood studios and distributors charge them for public exhibition of their film. However, if you want some popcorn or a choc-top during the show, be prepared to pay.

 

You get the picture.

 

As the publicans of New Orleans discovered well over a century ago, in life there’s no such thing as a free lunch. However, if that model doesn’t work for your industry, consider giving your customers a subsidised razor – and sell them the blade at a profit.

 

So can the razor-and-blade model work in your industry? Even in a cut-throat industry, Old Taskmaster says it’s worth considering.

 

Get it done – today!