The razor and blade business model is a strategy that relies on selling what is supposed to be the primary product at a low price or given away for free; while complementary goods get sold at high margins. For instance, Gillette’s razor would cost a few bucks. Instead, a set of blades will be 3-4 times more expensive.
At times company that seems to follow the razor and blade business model in reality use a variation of the same. In fact, take Apple, which has been a disruptor of a few industries. The company today uses a version of the razor and blade business model: the reversed razor and blade business model.
What is the reversed razor and blade business model?
Apple and the reversed razor and blade business model
If you ever bought an iPhone, you’re aware of the fact that it can cost as much as a computer. In fact, Apple rather than decrease its prices overtime is actually uses the opposite strategy. In fact, the latest confirmation of this strategy comes from the iPhone X, which has even higher margin compared to the iPhone 8. As reported by reuters.com:
The iPhone X smartphone costs $357.50 to make and sells for $999, giving it a gross margin of 64 percent, according to TechInsights, a firm that tears down technology devices and analyzes the parts inside. The iPhone 8 sells for $699 and has a gross margin of 59 percent.
In short, In this case, the iPhone is the blade. What is the razor then? That is the iTunes or the set of digital products Apple made available through its store. In fact, when Apple launched iTunes, a CD would cost anywhere between $16 or $18. Today you can get an album for $9.99 or 99 cents per song.
In fact, as reported by billboard.com:
Steve Jobs “said to us, ‘There’re two things you have to accept: 99 cents for every single song, and every song has to be sold as a single.’ And we went home and swallowed hard because that was tough for us to accept for us as a music industry…. If certain songs were really popular we should be able to set the price at whatever we thought was the right price as opposed to the $1 price. Steve said, ‘You know, you’ve got to keep it simple, you’ve got to keep it clean.’”
Said to Thomas Hesse, President, Corporate Development and New Businesses, Chief Digital Officer at Bertelsmann. He was Chief Strategy Officer for BMG Music Entertainment when the iTunes Music Store launched.