People Gillette is one of the most revolutionary companies of the 20th century. It is one of those very few companies that have survived for more than 120 years, which includes more than 7 revolutions and 2 World Wars. But what is more fascinating about Gillette is not the growth of the company, but the fact that Gillette gave the world a billion-dollar idea. And this idea laid the foundations of success for some of the biggest ventures on the planet, which include PlayStation, Xbox, Kodak, and even Amazon Kindle. The question is: What exactly is this strategy and how did a razor company go on to inspire legendary products like PlayStation and Xbox. And, more importantly, how can you apply this strategy to your startups?
1. Shaving in 18th and 19th Century
The answer to this question lies in the history of the Gillette company, which dates back to the late 1800s. This was the time wherein the trend of dense beards was fading away and the trend of clean shaves. The mustache look was on the rise. But back then shaving was not an easy task. It was even considered to be a dangerous undertaking. In the late 1800s, if you wanted to shave, you had only 2 options. The first option was a straight razor and the second option was a safety razor. The straight razor is the one that looked very similar to the one you might have seen in Game of Thrones. And they were considered to be very risky because they were super sharp and people were kinda scared to get them too close to their face or their Neck.
On the other hand, the safety razor was like a one-time purchase, but once you bought it, you had to frequently keep sharpening it, and that was a very, very tedious procedure. So the men of the 19th century had to seek professional help and they visited the barber shop 2-3 times every single week. One fine day, a traveling salesman was getting late to work and he got extremely fed up with using his life-threatening razor. And he had completely lost his patience to keep sharpening the safety blade every time he wanted to shave.
2. Gillette patented new Disposable Blades
That’s when he thought. Why not have a razor with a detachable disposable blade that can just be thrown away after every shave and can be replaced by a new one. And that is how the ideation of the modern-day razor blade happened. This angry pissed-off salesman was none other than Mr. King Gillette himself and his vision gave birth to the revolutionary invention of disposable blades, which then went on to change men’s grooming forever. King Gillette collaborated with his friend and got a patent for their razors and their blades, which is why nobody in the market could mimic their iconic design.
And that is how, for the next 15 years, Gillette remained a market leader and became a million-dollar company. But you know what Things started to change in 1921 and this is when the patents of the Gillette razor blade expired within just one year. Every single Gillette competitor was making a similar pair of razor blades, and this put Gillette into deep, deep trouble.
3. Razor Blade Model of Gillette
And this was reflected in their sales numbers. Also From 1921 onwards, the sales of Gillette razors saw a massive decline of 20 % in just one year, which is like a crazy downfall for a company that had been a market leader for more than a decade. Now, here’s where they needed to do something magical to save the company from failing. And that is when they came out with a pricing model, called the Razor Blade model this model went on to change the very dynamics of the razor business forever. This model was based on a very simple philosophy, wherein they said ‘Let’s sell the razors at an ultra-cheap price, with low margins and then sell blades at a higher margin. So that when the customer keeps buying the blades, we can have a recurring profit from each Customer’, Basically, in one line, it meant, Give them the razors and make them come back for blades. So Gillette started selling razors at an ultra-cheap rate to compete with the competition, and sometimes they even sold it at a loss just so that they can get people into the Gillette Ecosystem, and guess what? Within a year, the sales of Gillette razors shot up and after 1922, when the razor blade strategy was fully implemented, the sales of Gillette razors skyrocketed by a humongous 127 %.
I repeat: Gillette went from seeing a 20 % decline in its sales to seeing a massive increase of 127 % in just one year because of the execution of the Razor Blade strategy, And that is how Gillette established a legacy in pricing. And today, even after 100 years, it still serves as an inspiration for some of the most iconic brands of the 21st century, and the Razor Blade model, even today, is taught extensively in B-schools all around the world.
4. Many Companies Follow Gillette’s Razor Blade Model
Today, Sony uses its pricing model and sells its PlayStation consoles at a loss just so that they can make recurring profits through CDs and PlayStation Plus subscriptions. Sony incurred a loss of about 60 $, which is about ₹4200 for every PS4 console they sold just so that they could make billions through CDs and subscriptions. Kodak sold cameras at a dearth, cheap cost just to make customers come back for the film rolls And Amazon Kindle today is being sold at almost 0 profit just so that Amazon can make billions out of its e-book sales. This is the power of the Razor Blade model. So now the question is: how can you apply this model to your startup? Well, people. As far as I am concerned, there are 3 important lessons that you need to keep in mind while you apply this strategy to your startup.
5. Lessons From this Case Study
The first thing that you need to understand is that getting your customers into your ecosystem will always give you an unfair advantage over your competition because an ecosystem always results in massive customer retention. Secondly, while you apply this model, you need to find the points of maximum reluctance, and then you have to work on minimizing it. For example, you would be more reluctant to buy a PS4 console as compared to buying PS4 the games after buying the console. Therefore, selling consoles at a loss and hiking, the price of the games will give you exponential returns as compared to doing it otherwise. Thirdly, you need to be careful to not be so dependent on this model that you end up neglecting the very possibility of disruption because this is exactly what happened with Kodak. Now I don’t know how many of you know this, but then Kodak was so stuck in making money by selling the film rolls that despite being one of the first companies to file a patent for digital cameras, they did not realize that the film roll itself will seize to exist with the rise of the digital revolution. And the fact that by Sticking to the razor blade model, they were practically digging their own grave. And last and most importantly, every entrepreneur needs to realize that pricing is a double-edged sword. When used right. It will give you incredible returns, but if you don’t keep the track of the changes, it can even kill your business.