You might have never heard its formal name, but you and I are invited into a bad business model every single day. It’s called the “razor-and-blades” business model and it operates like this: sell a foundational product cheaply to consumers and then force them to buy expensive replacement parts once they’re dependent on that product. I have been sucked into several examples of this method, including razors, water filters, and, for sure, ink for our printers.
Awareness of this business model exposes how companies are profiting from the weaknesses in how consumers make decisions. They are actually making lesser-quality products due to consumers who would rather pay less upfront, blind to the strings of the long-term higher costs attached.
While this business model is destructive to our personal bank accounts and our global economy, it is also destructive to our environment. Landfills are being overwhelmed and natural resources are being depleted by consumer waste, which in this vicious cycle, hurts our economy even more.
As the article below points out, the only chance for us to break free from this bad way of business is to educate consumers so they can reject the invitation of short-term savings and long-term draining as often as possible and hold out for higher quality products that are more beneficial long-term.
To lighten this LIFEies up and show you a disruptive company that challenges this model, check out this incredible video: Dollar Shave Club. I love it. AND the company is killing it.
Over the past few months, I have:
1. Purchased a more expensive printer with way lower ink cartridge replacement costs.
2. Reused water bottles so I do not throw another 200 into the trash this year.
3. Used our water filter from the tap instead of bottled at the office.
There is more to do, but awareness and some change is a start.
Rule #4 from my book The Fantastic Life: Play Where You Can Win
Companies that utilize this razor and blades model have the upper hand in the consumer game. But by doing some research and taking a few small steps to change your habits, you can find the place you can play to win. Or, in this case, the place where you can buy to win.
A Bad Business Model Is Taking Over the World
Razor blades and iPhones are like addictive drugs. Here’s why that’s bad for your wallet and the economy.
BY: DANIEL ALTMAN
Daniel Altman teaches economics at New York University’s Stern School of Business and is chief economist of Big Think.
DECEMBER 26, 2014
Sean Gallup/Getty Images
Imagine if you could only fill up your car with one brand of gasoline. Once you bought the car, you were trapped — try any other brand, and your car wouldn’t even start. It sounds crazy, but this same business model is proliferating across industries from coffee machines to cleaning brushes. Changes in the global economy are only helping it to spread, almost always to the detriment of consumers.
It’s often called the razor-and-blades business model, or freebie marketing. Give consumers a proprietary platform — or at least sell it to them cheaply — and then force them to buy replacement parts to make it work. You probably have several examples around the house: inkjet printers with costly ink refills, water pitchers with expensive filters, and, yes, supposedly high-tech razors with blades that can sell for as much as $5 each. You could even put e-book readers and smart phones, both often sold below cost to rope in consumers, in the same category, though their “refills” don’t create as much waste.
Not by coincidence, the razor-and-blades model has a lot in common with addiction.
You get to try a product at price that’s often lower than the actual cost, and then you pay through the nose when you get hooked.
You get to try a product at price that’s often lower than the actual cost, and then you pay through the nose when you get hooked. This model isn’t based on the merit of the product; instead, it exploits several weaknesses in how consumers make decisions.
For example, consumers may not understand the long-term costs of the product when they first purchase it. If an inkjet printer with a built-in scanner, copier, and fax machine sells for $79, how much more will you pay to use it over, say, the next three years? To answer this question, you’d have to estimate how many pages you’ll print, how many pages — your kind of pages, not generic pages — can be printed with each ink refill, and the prices of the ink refills for the next three years. There’s very little transparency here; consumers are more likely just to go by the sticker price of the printer, which can be completely misleading.
Moreover, consumers typically underestimate their future consumption. Credit card companies take advantage of this weakness, too, by offering sweetheart deals with low interest rates up front; monthly payments can even turn big-ticket items into the equivalent of a razor and blades. To make matters worse, consumers tend to value money spent in the present disproportionately to money spent in the future, a tendency that makes their future selves relatively poorer. As a result, they’re more likely to buy a product with a low up-front price than one with a high up-front price but an actuarially lower cost over its useful life — consider auto leasing, for example.
The razor-and-blades model has costs for society, too. Instead of buying one razor that lasts for years, people discard countless blades with their plastic housing and rubber bumpers every week. Printer makers offer ink in tiny refills to ensure that consumers never face a high up-front cost, but they lose any economies of scale in the raw materials used to manufacture the containers. They pile up the waste just to keep consumers buying.
And in some industries, the razor-and-blades model may even replace public goods. Consider those home water filters. In the United States, their manufacturers rack up hundreds of millions of dollars in sales every year. Since laws require drinking water to be safe, these filters may be catering most to consumers’ tastes and peace of mind. But in other countries, where drinking water often isn’t safe, those pitchers and filters are a distributed solution to a problem that ought to be solved centrally. Instead of building the infrastructure to supply clean drinking water to millions of people, those who can afford them throw away millions of used plastic filters ever year.
Innovation may also be a victim of the razor-and-blades model. Companies that use the model have little incentive to make their products more efficient or durable, since waste is an explicit part of their strategy. Nor do they have much to gain from offering self-contained, more costly products that permanently fulfill consumers’ needs — a printer that never needs ink, a water purifier with no filters to replace, or a razor that stays sharp forever.
Only new entrants are likely to develop these kinds of products in an effort to unseat the incumbents. But even then, consumers may shrink from products with high up-front prices, even if they cost less in the long term. As a result, some companies — cheered on by opportunistic consulting firms — are offering disposable versions of the durable goods that ought to have destroyed the razor-and-blades model, like a throwaway digital camera.
Unfortunately, changes in the global economy are only making the razor-and-blades model more attractive. Lower oil prices will lead to cheaper plastics, giving companies a chance to drop prices or claim higher margins on disposable items. Tax cuts and austerity measures around the world will reduce funding for public goods. And as consumers’ attention spans shorten, their tendency to seek instant gratification from products will low up-front prices may increase.
So what will upset the razor-and-blades apple cart? Educating consumers might work, especially if they can find ways to make the business model work to their advantage. Long-term financing for long-lasting products might also help, as it already has for cars. But more likely, the model will stay profitable until resources are so scarce that consumers won’t want to throw anything away. Ironically, the razor-and-blades model is bringing that day ever closer.