Razors Versus Razor Blades

Almost 100 years ago, brilliant industrialists and their marketers realized that in many cases, the "real" money didn't come from the selling of the "big" item at a huge, one-time premium, it came from the on-going, regular-as-clockwork sale of inexpensive, yet high-margin support items necessary for the on-going operation or maintenance of the "big" item.  They learned firsthand that if you practically give away the big item, the profit to be made on the regular sales of the "little" support items can mean huge profits.

A better example of this pricing strategy can't be found than "Razors and Razor Blades".  Companies like Gillette, Schick, Wilkinson Sword and Remington, to name a few, made millions upon millions of dollars (and continue to do so to this day), "giving away" their razors (selling them "at" or "below" cost), so they could earn the "regular-as-clockwork" profits on the sale of proprietary, patent-protected razor blades.

This "give away the big item and just wait for the profits to roll in on the proprietary support items" strategy is so well known that it has come to be referred to as the "razors and razor blade" pricing strategy.  And this pricing strategy works better than ever with laser printers, plain-paper fax machines, photocopiers and their toner cartridges.

Here is an interesting story we heard in an "Econ" class, years ago.  When IBM was known as National Cash Register, they produced and sold a punch card reader that was no better than any other punch card reader of the day.  In fact, many felt the National Cash Register punch card reader wasn't as good as some of the other readers made by other manufacturers.  In an attempt to rise above the competition, National Cash Register implemented the "razors and razor blades" pricing strategy.

National Cash Register supposedly offered to sell their punch card readers for a fraction of what they used to sell them for.  People jumped at the chance to save so much money (thousands of dollars!).  Little did they know that in the fine print, they agreed to use only NCR punch cards in their machines.  Even those who read the fine print were assured by their NCR salesperson that their cards were "competitively priced for the quality" and they shouldn't be concerned.

Since the number one supply used by punch card readers is punch cards, the owners of the National Cash Register punch card readers had to buy their punch cards from NCR in order for their machines to perform their functions.  When the bills for the punch cards arrived, these customers were shocked to see that they were being charged substantially more for the NCR punch cards than they would have paid for the competitor's punch cards.  That difference, over time, would far exceed the money they saved up front.

At the time, since there were no laws to protect the consumer in a case like this and since those customers had voluntarily signed those agreements, there was nothing they could do except buy the NCR punch cards or stop using those machines and spend even more money to buy other punch card readers and try to stop their losses from mounting.

As a result, several decades ago, the government enacted the Sherman and Clayton Anti-Trust acts to prevent anyone from ever being subjected to this sort of problem, ever again.  These acts dictate that you cannot be forced to use a particular supply, nor can your warranty be "voided" because you did not use the high-priced, name-brand supply (this applies not only to laser printers, plain-paper fax machines and photocopiers, but any product that needs a regular supply of anything).

Nowadays, the best example of "razors and razor blades" pricing takes place in the laser printer, plain-paper fax and small office photocopier markets.  Industry estimates suggest that HP makes less than $100 on the sale of a $1000 - $1500 laser printer.  But, the industry estimates also indicate HP looks forward to making $1000 - $1500 annually on the sale of toner cartridges to that laser printer purchaser.  Who wouldn't accept a small $100 profit on a big ticket item knowing that the chances of making another $1000 - $1500 in annual profit on that item were nearly 100%