Are you aware of the “Razor blades business model”? Maybe not... But, just ask a MBA student or even any student who attended a commercial sciences course, and they will tell you about the “Razor blades business model”: a secret formula that could turn a business into a (very) profitable cash cow, or, even, into a “golden egg goose”. After having heard about it just once, students with an entrepreneurial mindset usually crave to do the same thing in their garage, dreaming to find the next idea that could follow that goldmine or “golden egg” business model.
What is needed to kick start such a business? Basically, it works like this: Take a razor handle, offer it for free (or at a low prices), make sure the blade refills only fit on YOUR razor handle, and start selling your blades at incredibly high prices. Now an “applied-to-another-industry” example: invent a printer, sell it for peanuts, make sure the ink cartridges only fit on YOUR printer, and start selling your cartridges (with a high frequency of course) at high prices. A last example: invent a new coffee machine that use cartridges, make sure these machines are installed in every office (or every house), offer the first few cartridges for free and… let the magic of business happen. Of course, some advertising can be useful. Spend a lot. Hire stars (George Clooney; who else?). Other ideas like that? Please write to me (and don’t tell your ideas to someone else…) at pdn@razwar.com. Sure, we will make a deal you and I…
The guy who invented that business model gave the name to a very famous brand. We decided to not quote the name of the brand, so I will not quote the name of the guy either. Just remember that he (truly) deserves a lot of respect and created one of the most admired companies, bought for 57 billion dollars by another company that I will not quote either. The guy (let’s call him Jack) is also the inventor of the golden egg goose…
Do you know about the “golden egg goose”? For sure, in your childhood, your parents must have told you that well renowned story, no? For the others, here is an “executive summary” of the story: A farmer found a goose and found out that that goose laid one golden egg every day. Of course, he was getting richer and richer each day, but that was not enough for him and, to try and get access to all of the golden eggs at once, the farmer killed the goose and opened its belly, to end up finding…nothing. (See also: http://en.wikipedia.org/wiki/The_Goose_That_Laid_the_Golden_Eggs).
Hence, I am just wondering if the incumbents in the “shaving” industry are not killing the golden egg goose, destroying the so-called “razor blades business model”. I succeeded in accessing some interesting market surveys that prove my point: Since several years, the market for system razors (razor handle that needs blade refills) is experiencing a slow growth in value (an average 2,5%) but a significant decrease in volume (number of units sold). (For French speaking readers, see for example: http://www.mondadoripub.fr/Mondadori_GALLERY_CONTENT//DOCUMENTS/MarketingService/Marche/rasage.pdf). The main cause of this apparently strange market behavior is the continuous and steady growth of razors and razor blade prices. Prices of razor blades are going up, as the two incumbents in the market do not want to compete on price; they are in a de facto oligopolistic market situation (I will explain what an oligopoly is in a next blog post), and would like to avoid a price war by all means.
Consider now the price structure of a razor blade. According to Sean Poulter, from Mail Online, who worked on the subject in June 2009 (Search Google: Main Online, Title “Sharp Practice…”, Sean Poulter), here is the typical price and margin structure of a cartridge of four razor heads and per razor head, for last generation razor heads. These are in-line with our observations and with other studies (I am particularly interested by all these studies related to this matter and welcome any suggestion or articles I should read or files I should study. Please also share with me your own “store checks”. Send this material to pierre@razwar.com).
Table: Margin and Price comparison for a typical “last generation” razor head (in UK)
|
| Cartridge of four | Each razor head |
| Manufacturing Cost | 20p (0,22 EUR) | 5p (0,06 EUR) |
| Packaging | 8p (0,09 EUR) | 2p (0,02 EUR) |
| Producer Profit Margin | £6,28 (6,95 EUR) | £1,57 (1,74 EUR) |
| Shop Profit Margin | £1,90 (2,10 EUR) | 47,5p (0,53 EUR) |
| VAT | £1,26 (1,97 EUR) | 31,5p (0,49 EUR) |
| Retail price | £9,72 (11,33 EUR) | £2,43 (2,83 EUR) |
Adapted from: Sharp Practice? The razor heads that cost just 5p to make, but sell for £2.43 each, Mail Online, June 2009. Exchange rate: 1 GBP=1,1080 EUR (8/03/2010)
What happens with such high prices? People (you and I) feel robbed. And, according to some shopping experts, it is actually that feeling of being robbed which is the main reason explaining why there are more and more razor robberies in grocery stores and supermarkets. This can reach such a point that in some countries (namely in Belgium, where I live) the robbery of razor blades became THE most important robbery in value in supermarkets (total amount robbed, per year, per store). Apparently the value of small thefts and robberies is so high that store chains now negotiate with the suppliers (the two “razor blades” incumbents…) to have them cover these costs. The responses to these robberies are numerous: The razor companies package their goods in even bigger packages, to diminish the possibility of hiding them under your clothes without being noticed. Razor handles and razor blade refills are often tagged with antitheft tags. Razor refills are often packed in antitheft boxes (…reminding the consumer that what they buy is extremely expensive) and, worse, in some stores, you now have to ask to the cashier to obtain your precious refills…
All these trends illustrate that the razor industry has probably gone too far in the razor business. With the envy to capture as much as profit as possible, the market is now experiencing a decrease in units sold, a sign that something important is happening. The number of robberies increases, service rendered in the stores weakens, and signs of discontentment occur here and there… The two incumbents are just killing the golden egg goose to see if there is more gold in the goose’s belly…
Will they find gold in the belly of the golden egg goose? I am not sure, and you know the story. Ah? Yes of course, we must state that Raz*War was born in the mind of a man who didn’t accept to pay such high prices for razor blades anymore (me). Another example of reaction against the too high prices of razor blades…. A “salutary reaction” we might say, as, it’s been a few months that consumers can now access an additional shaving brand: our brand http://www.razwar.com (it is also truly YOUR brand as it will not succeed without your endorsement). And the brand selling line says it all: Quality Shaving. Fair prices. That’s what we all wanted, no?
Now help me to spread the news!
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