Student Blogger - Fall WIP: Randal Picker Debunks the Razor-and-Blades Myth(s)
Stroll through the aisles of an electronics store—or, if you prefer scroll through the pages of Amazon—and you’re bound to see countless examples of an age-old marketing scheme: the “razors-and-blades” business model. The underlying concept is simple—first lure consumers with low-priced platform products, and then increase sales with high-priced complementary goods. For instance, fancy multifunction printers are sold at deep discounts, while the ink cartridges without which the printers would be useless seem exorbitantly priced. With the ascent of e-commerce, the razors-and-blades model has taken on a new relevance, as web entrepreneurs struggle to find a way to monetize the free services they offer. But, as Professor Randal Picker argues in The Razors-and-Blades Myth(s), there are two problems with the model. First, it doesn’t seem to work in theory, and second, it doesn’t seem to have been used by the very man widely credited with inventing it.
At a recent WIP talk, Professor Picker discussed the origins of the razors-and-blades myth. As the story goes, King Gillette realized that if he sold razor handles cheaply, he could increase the market for his recently invented disposable blades. But if this were so, Professor Picker hypothesizes, why couldn’t a competitor also offer a cheap—or even free—razor handle, and steal away market share? After all, once the initial supply of razors is exhausted, a consumer in the razors-and-blades world would be able to switch costlessly to a competitor’s handle. Alternatively, a competitor could dispense with the razor handle altogether, and focus solely on selling blades that were compatible with Gillette’s loss-incurring handle. Offering low-price handles seems only to make sense, Professor Picker surmises, in a world where either consumers are deeply loyal, or competitors are blocked from entering the market.
As it turns out, Gillette was able to exclude competitors from the market, but even so, the historical evidence does not suggest that he played the razors-and-blades game. In 1904, Gillette was granted patents for his safety razor design. In the patents themselves, Gillette seems to contemplate that the blades would be sold cheaply; indeed, one of the chief claimed benefits of the new blade was that, because they were so cheap to manufacture, consumers would treat them as a disposable rather than a durable good. As Professor Picker concedes, making something cheaply and selling it cheaply aren’t the same thing. However, Professor Picker argues that Gillette had to offer the blades for a low price to entice consumers who had at that point only ever shaved with a straight blade. Offered a new product that was both disposable and expensive, consumers were likely either to stick with their tried-and-true blade, or to make the new blade last longer by resharpening it.
By studying catalogues and newspaper ads from after Gillette was awarded the 1904 patents, Professor Picker determined that, rather than playing razors-and-blades, Gillette was in fact selling the razor handle itself as a luxury good. A Wanamaker ad in The New York Times listed a new Gillette razor plus a dozen blades at $5, and a replacement pack of a dozen blades at $1, making the implicit price of the razor handle itself $4. In contrast, the same ad offered a clearance price of $12 for men’s suits, and $12.50 for newly tailored women’s suits. To put this in context, Professor Picker notes that $5 was the equivalent of “roughly one-third of the average weekly industrial wage in 1900.” It seems that during the time when, thanks to patent protection, it would have made the most sense to engage in razors-and-blades marketing, Gillette was doing the exact opposite.
Gillette’s response to the impending expiration of its patents in 1921 further undermines the razors-and-blades myth. After first securing a patent on a new razor that promised “an increase in shaving efficiency of more than 75%”—leaving unspecified, Professor Picker notes, precisely what that meant—Gillette repackaged its older razor and sold it for $1. Gillette’s annual report for 1921 shows that, based on the success of the lower-priced razor, it had “sacrificed potential razor blade sales by selling razors at a premium price” during its period of patent protection.
The fact that Gillette left the price of blade largely untouched after introducing the “freemium” version of its old razor suggests that Gillette was forced by emerging competition into playing some form of razors-and-blades after its patents expired—selling a cheap handle bundled with comparatively expensive blades. Even if that was so, however, Professor Picker points out that this actually weakens the razor-and-blades model, which in its traditional formulation holds that it is “almost impossible to play razors-and-blades without a way to lock the consumable goods to the platform.” Perhaps, as Professor Picker suggests, Gillette’s willingness to play—and succeed with—this modified form of razors-and-blades may have been in part due to its large installed consumer base resulting from its contract to supply the US Army with razors and blades during World War I.
Professor Picker’s research leaves us with not only the historical curiosity that the man thought to have created razors-and-blades was reluctant to play it himself, but also a puzzle with important implications for our modern world. As Professor Picker remarks about Gillette’s pricing strategy after the expiration of its patents, razors-and-blades “seems to have worked at the point where the theory suggests that it shouldn’t have.” Many current products—such as cell phones and video game consoles—are two-stage platforms similar in some ways to razors and blades. Considering the lessons we can learn from Gillette’s example, it's worth asking to what degree the law should facilitate devices that control access to those platforms. Should, for instance, the Digital Millennium Copyright Act criminalize the circumvention of access-restriction measures? These and many other similar questions continue to be debated. Professor Picker’s revelation that—at least in the supposedly canonical case of King Gillette—the locks provided by the legal system are less beneficial than previously thought is a significant contribution to this ongoing debate.