Have you ever gotten a free razor in the mail? You know, when Gillete or Schick releases a new razor, does one magically appear in your mailbox? I’ve gotten several free razors over the years. Have you ever wondered why they gave you a razor for free? The razor is just the way that you get hooked into buying the company’s more profitable products (the blades). The concept of giving something away at a loss in hopes to hook them is nothing new and this scenario is known as a loss leader. Sometimes it takes guts to run with a loss leader campaign but at the end of the day, it’s smart business… sell the razor blades, not the razor.
This has to be one of the best stories and concepts I’ve heard in a while…sell the razor blades, not the razor. It’s one of those common sense type stories that you might not think about on a day-to-day basis, but when it hits you, you get the ah-hah moment complete with the brightly lit bulb.
I can’t remember where exactly I read about the razor vs. razor blade concept but I do know that the article involved Robert Mondavi, and him teaching his son the concept. Think about all the industries that take advantage of this scenario. For example, Expedia takes guest rooms provided by hotels at a discount, marks them up, and sells them for a profit. Generally speaking, their markups are usually around $20+ a night. Hotels sell them rooms simply because of their large distribution channels and guests book through them because they generally end up with a cheaper rate than booking directly with hotels. $20 gross profit per room + thousands of properties, thousands of interested guests, multiple night stays, you’re beginning to see the power of the model. They don’t have to deal with guest check-ins, housekeeping, room maintenance, etc. because that would be the razor. Instead, they use their distribution services to sell the blades and let the hotels do the work. Granted their net operating margin declined in 2010 something like 8.5%, their high volume of sales produces quite a bit of money. Quite an effective example of being a middle man if you ask me.
Do you have any other examples you want to share about selling razor blades instead of razors?
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