The Razor Blade Model
The Razor Blade theory is often used in many businesses and is in fashion for more than a century. This theory works on an interlocking model of 2 or more than 2 items that are sold by a company. This also makes a business profitable because customer retention & customer's willing to acceptance (WTA) is the primary focus & a factor here.
What this model is all about?
This theory tells us that any business which is using interlocking model can make more sales, revenue & profits by selling one item at a very low cost and the other dependent item on any cost to fill the gap & increase the sales volume.
Lets understand this theory in more detail:
There are two parts of it. One is Razor and other one is the Blade. Independently these two parts are of very limited use. When combined this forms a machine that is used by all for shaving purpose. Here usage & consumption is a big factor.
Only razor is of no use. It must be loaded with blade to make it work. Companies often sell the Razors (without blade) for a cheap price. However the price of razor varies as the customer, his choices, his willingness to pay (WTP) varies. Companies do not make much profit just by selling the razor however this is never the strategy to make a lot of profit by selling Razors. The purpose of selling razor is to build a customer base with strong retention & willing to pay and willingness to acceptance.
The blade is what makes the companies profitable. Blade is a reusable thing that is used repeatedly by the users but not without razor. Blade without razor has very limited work function. When companies sell the Razors at a cheaper price they can now put Blades to any range and even if the blades are put for a cheaper price, the volume of sales is much more which creates the profit to a company.
The Razor Blade Model:
This model states that when an interlocking item is being sold to a customer then customer has no other choice but to accept the other product on which the first product relies heavily.
This model also says that a customer might not pay $2 for one Blade however he will pay $0.50 for the Razor and this $0.50 razor will indirectly compell the customer to pay $2 to buy a blade which he, earlier, refused to pay.
Because of the durability of the razor, it will work for long whereas the blade will be consumed in a short period because of which company will get recurring business from a single customer.
If you have a business or startup where the business model is focused on interlocking of 2 or more items then this theory can be very valuable to your business. Because on the one hand you will be selling one item for a lower or cheaper price that customer will not hesitate much to buy. However when that item is sold then the other item which fills the part, can be sold as a seperate product or service.
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