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The razor and blades business model (also called the "bait and hook model" or the "tied products model") works by selling an initial "master" product at a subsidized price, and making the profit on high margin "consumables" that are essential to the use of the master product.The master product may actually be sold at a loss, in order to "capture" the customer into using the consumable product.
Origins This business model is credited to King C. Gillette, who used it for his sales of razor handles and disposable razor blades. The model continues to be used in the disposable razor blade business to this day. Bottle Caps Gillette was supposedly motivated by William Painter's Crown Cork bottle cap and his theory that a successful invention was one that needed to be purchased over and over again.* Oil Lamps in China With a monopoly in the American domestic market, Standard Oil and its owner, John D. Rockefeller, looked to China to expand their business. Representatives of Standard Oil gave away eight million kerosene lamps for free or at greatly reduced prices. This also resulting in a slogan among American businessmen, "Oil for the lamps of China." In other words, if you give them the lamp, they'll buy the kerosene from you. "Oil For the Lamps of China" became the title of a book written by Alice Tisdale Hobart explaining the phenomenon in a fictionalized way. Comparison with loans In effect, this is the same as offering a high-interest loan to the customer to offset the price of the master product, which is to be paid off in installments (and eventually result in high profits for the seller) as they use the consumables. Gillettes modern expansion In 2004, The Gillette Company expanded this business model with the M3Power, a vibrating safety razor with proprietary blades and standard batteries. While not a proprietary battery, it still benefits Gillette by expanding the consumer market for batteries, where Gillette owns the Duracell battery brand. Additional Topics This model may be threatened if the price of the high margin consumables in question falls. For example, computer printer manufacturers have gone through extensive efforts to make sure that inkjet printers are not compatible with cheaper aftermarket ink cartridges, such as designing the cartridges in a way that makes it possible to patent certain parts or aspects, or invoking the Digital Millennium Copyright Act. In Lexmark v. Static Control the U.S. Supreme Court ruled that circumvention of Lexmark's ink cartridge lock does not violate the DMCA. On the other hand, in August 2005, Lexmark won a case in the U.S. that allows them to sue certain large customers for violating their boxwrap license. Consumers may also find other uses for the subsidized product rather than utilize it for the company's intended purpose, which adversely affects revenue streams. This has happened to "free" personal computers with expensive proprietary Internet services and contributed to the failure of the CueCat barcode scanner. In markets where all the major competitors follow this business model, there may be suspicions of the existence of cartels and violation of antitrust legislation. In some cases, notably auto parts in the United States, legislation exists specifically to prevent this business model from existing. Examples include See also | ||||||||
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