In business schools, we teach various concepts that are important. Recently, a former student contacted me about a new venture idea. After listening to him discuss the specifics of the business model, I could not help but think of Porter’s Five Forces concepts; specifically supplier/customer lock-in. When I integrated that concept into his venture as a problem (and opportunity), it became apparent to him that the concept met the asphalt.
Amazon selling its Kindle devices at cost to focus on the content (books, apps, music) purchases.The razor blade strategy is another important business strategy concept that sometimes is overlooked. Investopedia defines this strategy as “any business practice in which a company offers a one-time product – usually at little or no cost (or loss leader) – that is complemented by another product for which the consumer is required to make repeated purchases.” There are many examples implemented from this concept:
- Companies, such as HP, which sell a printer in order to build sales for their toner/ink-jet cartridge.
The big players in the razor blade market, Procter & Gamble (Gillette) and Energizer Holdings (Schick), generate significant revenue from shaving blade market ($3.6B US in 2012). Their strategy is simple … incentivize consumers to purchase the blade holder while selling the replacement blades without discount. You have seen sales for the holders, but how often do you see coupons or sales on the replacement blades?
Now introduce the Internet and online purchasing. Recently, several startups (Dollar Shave Club, 800Razors) have focused on disrupting this market and pricing strategy. These businesses offer consumers a subscription-based model to deliver replacement blades on a pre-determined frequency. Dollar Shave Club will deliver one of three different products each month ranging from $1-9.00; with free shipping for the two premium products. Their business model offers flexible product upgrading/downgrading and delivery frequency. In addition, you can order complementary shaving and grooming products.
Interesting huh? A relatively commodity purchase with probably limited brand loyalty. So what has happened? Several things. While only having a small percentage of the total market, the online market has grown in the last 12 months; doubling to $263M. In the first five months of 2015, online sales amounted to $141M.
As in every market innovation situation, there is a response. To protect their 60% market share, P&G has recently introduced the Gillette Shave Club priced from $3.50 — $4.90 for three of their popular razor products. P&G predicts that online razor sales will grow at an average of 25% over the next five years.
So what does this show? Disruptive technology (online) can “cut” a legacy (and successful) business strategy. And force a consumer products giant to respond to the market and innovative models.