Razor and blade
This is what’s called a reverse razor and blade strategy. Where the blade (in this case the App and software ecosystem) becomes what justifies a wide premium on the core product.
- Ad-supported Model (Example: Spotify): Spotify offers both free ad-supported services and paid memberships. In 2022, it generated €11.7 billion, with the majority of revenue (87.4%) coming from premium memberships and the rest (12.6%) from ad-supported users.
- Freemium Model (Example: Dropbox): Dropbox uses a freemium model to convert users into paying customers through various strategies like in-product prompts, free trials, and email campaigns. In 2021, Dropbox generated over $2.1 billion in revenue.
- Subscription-based Model (Example: Netflix): Netflix operates on a subscription-based model with basic, standard, and premium plans. In 2021, it generated over $29.6 billion in revenue, with nearly 223 million paying members worldwide.
- Consumption-based Model (Example: Amazon): Amazon’s revenue in 2022 exceeded half a trillion dollars, with significant portions coming from online stores, third-party seller services, AWS, advertising, subscription services, physical stores, and other sources.
- Commission-based Model (Example: Airbnb): Airbnb charges both guests and hosts fees for bookings. In 2022, it generated $63.2 billion in gross booking value on over 393.7 million nights and experiences booked.
- Hidden Revenue Model (Example: Google): Google generates a substantial portion of its revenue from advertising, particularly Google Search, YouTube Ads, and Network Member sites, accounting for over 81% of its total revenue in 2021.
- Razor and Blade Model (Example: Apple): Apple sells its products, like the iPhone, at a premium price, with a substantial markup. This model is complemented by the App and software ecosystem, allowing Apple to justify higher prices.
- Direct Model (Example: Tesla): Tesla follows a direct sales approach by manufacturing its cars and battery packs at its own facilities and selling them directly to customers through online and physical stores.
- Indirect Model (Example: Apple): Apple’s sales primarily come from indirect channels (62%), including third-party cellular networks, wholesalers/retailers, and resellers. These channels play a crucial role in amplifying sales, scaling, and offering subsidies.
1. Ad-supported Model: Revenue is generated primarily through ads shown to users of the service.
- Spotify: Provides both a free ad-supported service and a premium subscription.
- YouTube: Allows users to watch videos for free but shows ads before and during video playback. YouTube Premium subscribers can watch ad-free.
- Hulu: Offers a basic subscription that is cheaper but includes ads. For an increased price, subscribers can watch content ad-free.
2. Freemium Model: Offers basic services for free, while advanced features or ad-removal come at a cost.
- Dropbox: Allows users a certain amount of storage for free, with premium plans offering more storage and features.
- Evernote: Provides basic note-taking functionalities for free, with advanced features like offline access, more storage, and collaboration tools available in premium versions.
- LinkedIn: Users can create profiles and connect with others for free, but advanced networking and job search features are part of LinkedIn Premium.
3. Subscription-based Model: Users pay a regular fee (often monthly or annually) to access the service.
- Netflix: Charges users a monthly fee to access its vast library of films and TV shows.
- Microsoft 365: Users pay a subscription fee to get access to a suite of productivity tools including Word, Excel, PowerPoint, and more.
- Adobe Creative Cloud: Instead of buying software licenses outright, users pay a monthly fee to access a suite of professional creative tools.
4. Consumption-based Model: Charges users based on the amount of resources or services they consume.
- Amazon AWS: Charges businesses based on the computing power, storage, and other cloud resources they use.
- Electricity Companies: Charge households based on the amount of power they consume.
- Ride-hailing services like Uber: Charges passengers based on the distance and time of the ride.
5. Commission-based Model: Takes a percentage or fee from transactions made through the platform.
- Airbnb: Takes a commission from both hosts and guests for each booking.
- eBay: Charges sellers a fee based on the final selling price of their item.
- Etsy: Takes a commission for each sale made through its platform.
6. Razor and Blade Model: The primary product is sold at a low price (or given away for free), but complementary goods or services are sold at high margins.
- Gillette: Sells razors at a low price but replacement blades, which consumers need to buy regularly, have high margins.
- Printers: Many companies sell printers at competitive prices but make their profit from the sale of replacement ink cartridges.
7. Direct Sales Model: Products are sold directly to the consumer, eliminating the need for middlemen.
- Tesla: Sells cars directly to consumers through its own stores and online platform.
- Dell: Initially built its business by selling PCs directly to consumers, bypassing traditional retail channels.
8. Indirect Sales Model: Uses intermediaries or middlemen to bring products to market.
- Apple: While it sells products directly through its own stores and website, a significant portion of sales also comes through third-party retailers and cellular networks.
- Nike: Sells products through its own branded stores and website, but also relies heavily on third-party retailers.