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The Versatility and Longevity of the Razor and Blades Business Model

gillette-razor-blades.jpgOne of the best kept secrets in the business world is the razor and blades business model. Only it's not just for consumer goods anymore and hasn't been for a long time. Everybody from Microsoft and HP to Sony and Comcast has employed it to grow businesses and invigorate existing ones.

Gillette started it all by giving away the razors to lock in customers and create a steady stream of ongoing blades business. But you'd be amazed at how versatile this business model really is. Here are seven examples you might not have recognized.

Microsoft. Instead of IBM paying Microsoft for the original DOS operating system development, Bill Gates negotiated a royalty fee for each unit sold and non-exclusivity, allowing him to cut the same deal with future clone-makers. To this day, PC users are hooked on Microsoft's operating systems, not to mention Internet search engines and the like.

Inkjet printers. Printer manufacturers like HP, Epson and Canon don't typically give them away, but many retailers do. In any case, margins on the box pale in comparison to margins on the printer cartridges. And printer makers go to great lengths to get consumers to buy proprietary versus after-market versions.

Video game consoles. If Sony or Microsoft makes money on the console these days, it isn't much. The revenue is nice, but profits come from game titles.

Wireless phone companies. Cell phones are there to get subscription customers. That's why they offer great deals on phones if you lock in for a year or two. In fact, almost all businesses where the hardware is subsidized essentially follow the razor and blades model.

Satellite and Cable services. Comcast and Dish essentially give away the cable box to lock in monthly subscription fees.

Technology licensing. The technology licensing business is booming, with companies like Qualcomm, IBM, and Texas Instruments making billions, in aggregate, on per unit royalty fees, not one time license fees. Their engineers actually work closely with customers to incorporate their technology in customers' end-user products. But it's the royalty fees they're after.

Sony. With Samsung, Panasonic, and others nipping at its heals, Sony realized that consumer electronics margins were only going to get squeezed more. So it got into entertainment content. Not exactly razor and blades, but a similar concept. In any case, Sony has often attempted the model with Memory Stick and other technologies.

Then there's open source software. The jury's still out on whether this works or not, but these guys have to lock in customers and get paid somewhere along the line, right?

Loss leader marketing is similar, but there's nothing quite as eloquent as the razor and blades model for locking in customers for repeat high-margin sales.

Have you or your company used this business model? Did it work? Got any other creative examples I missed to share with your fellow readers?

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