Did you know Amazon is the world’s largest Ecommerce business valued at $1.6 TRILLION with a whopping annual revenue of $280 billion and growing. That’s more than the GDP of 90% of the world’s countries!
So there is much to learn from Amazon. On November 19, 2007, Amazon launched its e-reading device, the Kindle. The Kindle gives you access to digital books and provides the best method for reading them and that’s the guiding principle that drives the Kindle. It’s about reading, reading and reading.
But did you know that Amazon, deliberately sells its Kindles at a loss. The Kindles current starting price is at $59.99. Over the years, Amazon kept the price of the Kindle as low as possible to achieve market adoption. It even sold it at a loss because it knew that when someone buys the Kindle, they would have to buy the Ebooks from Amazon. And an average Kindle can hold up to 2000-3000 ebooks. Though, they did not make any profits from selling the Kindle on the front-end, they made recurring revenue and much higher profits over the long-term through the sales of E-books. Today, 10% of Amazon’s income comes from ebook sales, that’s about $28 billion.
However, this is not a new marketing strategy. In the 1900’s, the shaving behemoth Gillette introduced this marketing strategy which is popularly known as the Razor and Blade Model.
The Razorblade model is a pricing tactic in which a dependent good is sold at a loss (or at cost) and a paired consumable good generates the profits. Also known as a razor and blades business model, the pricing and marketing strategy is designed to generate reliable, recurring income by locking a consumer onto a platform or proprietary tool for a long period.
The concept is similar to the “freemium,” in which digital products and services (e.g., email, games, or messaging) are given away for free with the expectation of making money later on upgraded services or added features.
Some firms find more success in selling consumables at cost and the accompanying durables at a high-profit margin in a tactic known as the reverse razor and blade model.
Understanding the Razor-blade Model
If you’ve ever purchased razors and their matching replacement blades, you know this business method well. The razor handles are practically free, but the replacement blades are expensive. King Camp Gillette, who invented the disposable safety razor and founded the company that bears his name, popularized this strategy in the early 1900s. Today, Gillette (and its parent Procter & Gamble) employs the strategy to great profit.
Example of a Razor-blade Model
The video game industry provides another example of the razor-razorblade model pricing strategy. Game console makers have a track record of selling their devices at cost or at a low-profit-margin by planning to recoup the lost profits on the high-priced games, which consumers buy far more often over a long period of time.
For example, Microsoft makes no money on the sale of its Xbox One X game console even at an average $499 price, but it gets about $7 out of each $60 video game.
Service providers often sell mobile phones below-cost or give them away because they know they will make the money back over time from recurring fees or data charges. Printers are sold at cost, a loss, or at a low-profit-margin with the understanding that ink cartridges will provide recurring revenue.
As a marketer or a business owner, you need to have a clearly defined strategy on acquiring new customers and do the math and budgeting on how much you can spend to acquire one customer versus the lifetime value of a customer.
Most businesses who lose money on digital marketing do not understand this model and do not factor in the costs and investment to acquire a customer versus the lifetime value of a customer.
Schedule a strategy call with one of our experts to see how you can implement this strategy in your sales funnels by increasing customer acquisition and backend profitability.
