What is setting a price for a product that must be used along with the main product such as blades for a razor?

What Is the Razor-Razorblade Model?

The razor-razorblade model is a pricing tactic in which a dependent good is sold at a loss (or at cost) and a paired consumable good generates the profits.

Also known as a razor and blades business model, the pricing and marketing strategy is designed to generate reliable, recurring income by locking a consumer onto a platform or proprietary tool for a long period. It is often employed with consumable goods, such as razors and their proprietary blades.

The concept is similar to the "freemium," in which digital products and services (e.g., email, games, or messaging) are given away for free with the expectation of making money later on upgraded services or added features.

Some firms find more success in selling consumables at cost and the accompanying durables at a high-profit margin in a tactic known as the reverse razor and blade model.

Understanding the Razor-Razorblade Model

If you've ever purchased razors and their matching replacement blades, you know this business method well. The razor handles are practically free, but the replacement blades are expensive. King Camp Gillette, who invented the disposable safety razor and founded the company that bears his name, popularized this strategy in the early 1900s. Today, Gillette (and its parent Procter & Gamble) employs the strategy to great profit.

The biggest threat to the razor and blades business model is competition. Companies may thus attempt to maintain their consumable monopoly (and maintain their margin) by preventing competitors from selling products that match with their durable goods. For example, computer printer manufacturers will make it difficult to use third-party ink cartridges and razor manufacturers will prevent cheaper generic blade refills from mating with their razors.

With trademarks, patents, and contracts, firms can stifle competition for a long enough time to become a leader in their industry. Keurig is a good example of a company that capitalized on this model by preventing competitors from selling complementary products. They held a patent on the K-cup coffee pods until 2012 and, as a result, enjoyed substantial profits and soaring stock prices. However, after the patent expired, competitors flooded the market with their version of the K-cup, eroding Keurig's profits and market share.

If a competitor offers a comparable consumable product at a lower price, the sales of the original company's product suffer, and their margin erodes. After years of price increases that led to complaints that their razor blades were too expensive and in response to subscription-based "clubs" stepping in with competitive products at a lower price, Gillette lowered the prices of their razors and blades in 2018.

Key Takeaways

• The razor-razorblade model is a pricing strategy in which one good is sold at a discount or loss and a companion consumable good at a premium to generate profits.
• Intellectual property protection and contracts give firms a competitive advantage as competitors are inhibited from mimicking their consumable goods process.
• The razor-razorblade pricing strategy was popularized by the disposable safety razor inventor Gillette, which sold razors at cost and replacement blades for a profit.
• The gaming industry employs this strategy by selling gaming machines at cost or a loss and their complimentary video games for profit.

Example of a Razor-Razorblade Model

The video game industry provides another example of the razor-razorblade model pricing strategy. Game console makers have a track record of selling their devices at cost or at a low-profit-margin by planning to recoup the lost profits on the high-priced games, which consumers buy far more often over a long period of time.

For example, Microsoft makes no money on the sale of its Xbox One X game console even at an average $499 price, but it gets about $7 out of each $60 video game.

Service providers often sell mobile phones below-cost or give them away because they know they will make the money back over time from recurring fees or data charges. Printers are sold at cost, a loss, or at a low-profit-margin with the understanding that ink cartridges will provide recurring revenue.

What are the two new product pricing strategies?

Market skimming and Market penetration

Market-Skimming Pricing (Price Skimming)

Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the higher price; the company makes fewer but more profitable sales

Market skimming works best under the following conditions

1) The product's quality and image support it's high price and enough buyers want the product at that price

3) The cost of producing a smaller volume must not be so high that they cancel the advantages of charging more

4) Competitors should not be able to enter the market easiley and undercut prices

Market Penetration Pricing

Setting a low price for a new product to attract a large number of buyers and a large market share

Market penetration works best under the following conditions

1) Market must be highly price sensitive so that a low price produces more market growth

2) Production & distribution costs must decrease as sales volume increases

3) Low price must keep out the competition & penetration price must stay low

What are the 5 product mix pricing situations?

1) product line pricing

2) optional product mix pricing

3) captive product pricing

4) by-product pricing

5) product bundle pricing

Setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors prices

The pricing of optional or accesory products along with a main product

Captive product pricing (Two-part pricing)

Setting a price for products that must be used along with a main product, such as blades for a razor and games for a video game console

Setting a price for by-products to make the main product's price more competitive. Such as selling animal poo from the Zoo animals.

Combining several products and offering the bundle at a reduced price. Examples include Mcdonald's combo (fries, drink, and sandwich) and Bath & Body Works "Three-fer deals"

What are the seven price adjustment strategies?

1) Discount & allowance pricing

2) Segmented pricing

3) Psychological pricing

4) Promotional pricing

5) Geographical pricing

6) Dynamic pricing

7) International pricing

A straight reduction in price on purchases during a stated period of time or of larger quantities

A price reduction to buyers who pay their bills promptly

Example: 2/10, net 30

A price reduction to buyers who buy large volumes

Functional Discount (Trade Discount)

A price reduction to trade-channel members who perform certain functions such as selling, storing, and record keeping

A price reduction to buyers who buy merchandise or services out of season

Promotional money paid by manufactures to retailers in return for an agreement to feature the manufacturer's products in some way

A price reduction given for turning in an old item when buying a new one

Payments or price reductions to reward dealers for participating in advertising and sales support programs

Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs

Customer-Segmented Pricing

Different customers pay different prices for the same product or service

Examples: Movies & Museums giving student and senior discounts

Different versions of the product are priced differently but not according to differences in their costs

Example: Evian water bottle and Evian facial mist

A company charges different prices for different locations, even though the cost of offering each location is the same

Example: Colleges and out of state tuition

A firm varies its pricing by the season, the month, the day, and even the hour

Example: Movie theaters and matine pricing

Segmented pricing is effective when  _________

1) The market must be segmentable and segments must show different degrees of demand

2) The cost of segmenting and reaching the market cannot exceed the extra revenue obtained from the price difference

Pricing that considers the psychology of prices, not simply the economics; the price says something about the product

Prices that buyers carry in their minds and refer to when they look at a given product

8 is round and creates a ________, whereas 7 is angular and creates a __________.

Soothing effect

Jarring effect

Temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales

Example: Discounts, special-event pricing, cash rebates, low interest financing, longer warranties, and free maintainence

Downsides of promotional pricing include _________.

1) Can create deal-prone customers who wait until brands go on sale before buying them

2) Can erode a brands value in the eye of the customer

Setting prices for customers located in different parts of the country or world

A geographic pricing strategy in which goods are placed free on board a carrier; the customer pays for the freight from the factory to the destination

Uniform Delivered Pricing

A geographical pricing strategy in which the company changes the same price plus freight to all customers, regardless of their location

A geographical pricing strategy in which the company sets up two or more zones. All customers within a zone pay the same total price the more distant the zone the higher the price

A geographical pricing strategy, in which the seller designates some city as a basing point and charges all customers the freight cost from that city to the customer.

Freight Absorption Pricing

A geographical pricing strategy in which the seller absorbs all or part of the freight charges to get the desired business

Adjusting prices continually to meet the characteristics and needs of individual customers and situations

Demand dynamics is also known as

The same good can cost a very different amount of money simply by the location it is purchased in

-Comes from additional costs of operations, product modifications, shipping and insurance, import tarrifs and taxes, exchange-rate fluctuations, and physical distribution

What are the four responses a company can make in regards to changing prices?

1) Reduce its price

2) Raise the percieved value of its offer

3) Improve quality or percieved price

4) Launch a low-price "fighter brand"

Setting prices below cost with the intention of punishing a competitor or gaining higher long run profits by putting competitors out of business

Preventsd unfair price discrimination by ensuring that sellers offer the same price terms to customers at a given level of trade

When a seller states prices or price savings that mislead consumers or are not actually available to consumers

Scanner Fraud/Price Confusion

Retailers failing to enter current or sale prices into the system, or intentionally overcharging customers

What is setting a price for products that must be used along with a main product such as blades for a razor?

What is setting a price for products that must be used along with a main product?

When setting a price for your product what should you consider?

What sets the base for product prices?