The razor and blades business model involves selling an initial durable item (the razor) at cost or subsidized and then making the profit through the sales of consumables (the blades). It is a business model that operates in the sales of electric toothbrushes, the video console market, printers, and ink, as well as the razor/razorblade market, which it takes its name.
While the initial durable item is often sold relatively cheaply, the business model still relies on some degree of switching costs – as explored below.
Importance of switching costs for the razor-razorblade business model
The importance of having some degree of switching costs in the razor-razorblade business model is to allow sufficient time to recoup the cost of the initial durable item (the razor) with profit through the sale of consumables (the blades).
If there are no switching costs, consumers may get multiple initial items across different companies (with little money actually spent on the consumables for each). This can be especially costly if the initial product is subsidized and sold at a loss (e.g., video consoles). If your entire profit stream comes from the sales of consumables, it is important that at least overall, customers have some loyalty to the product after the initial purchase of the item.
Source of switching costs in the razor-razorblade business model
The initial cost of the durable 'razor'
One source of switching costs for customers is the initial cost of the durable item (i.e., the razor). Even if the initial item is subsidized, it may still be a modest investment for customers – while video-game consoles are initially subsidized, for example, they still cost several hundred dollars. This initial outlay provides some degree of lock-in for customers.
While a relatively cheap initial item may be required to get customers to try your offering over that of a competitor, if the initial item is simply given away, there may be no lock-in – customers have no reason to stick with your product. As such, there is a balance between providing the initial durable item too expensive (high-lock in, but difficulty acquire initial customers), and too cheap (no-lock in, but easy to acquire initial customers).
Difficulty in making the switch
Another example of switching costs is the difficulty associated with making the change. If you take printers as an example. Buying a printer and setting it up, while not difficult, takes some effort. This effort provides some switching costs for customers – once you have bought and set up your printer (with some initial cost), many customers will stick with this printer over trying out a competing option.
Loyalty or a superior product - customers wouldn't want to switch
A final source of customer lockin-in is simply that you have a superior product (or one that at least a segment of customers regard as superior). Having some specific reasons why customers prefer your product over that of your competitor will mean that they don’t want to make the switch – even if there is little cost associated with doing so, and it is not that difficult to do.