One day I opened up my mailbox, and there inside was a box from Gillette containing a brand-new Mach3 razor. It turned out that the box was addressed to my neighbor, which is just as well: the idea of shaving with a triple-blade razor seemed a bit—excuse me—over the edge. That was just a few years ago, and since then, the Mach3 has been superseded by models with four and five blades, with or without a vibrating feature—the mind boggles. But the twin-blade Gillette SensorExcel razor I used for many years also came in the mail for free, and also, coincidentally, wasn’t addressed to me—I got it from a friend who didn’t want it. Still, exactly as Gillette hoped, I spent many, many dollars over the years on their obscenely overpriced blades before breaking down and buying an electric razor. Like countless other people, I was sucked in by the “give-away-the-razor-sell-the-blades” concept. Old-fashioned and counterintuitive, this marketing gimmick is still going strong.
Razor-Thin Profit Margins
Around 1900, a salesman named King Camp Gillette dreamed up the idea of disposable razor blades. Before that time, razor blades were thicker and were simply sharpened when dull—a time-consuming and imprecise (not to mention dangerous) process that no one enjoyed. Gillette’s innovation was to make the blades thin enough and inexpensive enough that they could simply be thrown away when they dulled. At first, he couldn’t sell the blades for as much money as it cost to make them, but then he had a wacky idea: he would give away the razor handles. People who got them perceived them as being valuable—but only when fitted with one of Gillette’s blades. So there was a subtle yet forceful psychological pressure to maintain that value by continually buying the blades. After a few months of blade sales, the cost of the handle was recovered and Gillette began to make a profit. Within a decade, Gillette’s company dominated the razor market and made its inventor extremely wealthy.
Nowadays, Gillette’s strategy has been—excuse me again—honed to a new level of sophistication. Each new model of razor has a unique design such that only blade refills made to those exact specifications will fit. When possible, the designs are patented so that third parties are prevented from selling their own refills; Gillette, meanwhile, charges a small fortune for their blades, and customers dutifully buy them. Predictably, when a patent expires, opening the market for generic competitors, Gillette releases a new design, along with a new marketing campaign geared toward making people with last year’s model feel like they’re no longer—sorry—on the cutting edge.
The Leading Edge
This strategy is technically a form of what’s called “loss-leader” marketing. In general terms, a loss leader is a product sold at a loss in order to generate secondary sales later on. In some cases, a loss-leader product doesn’t produce dependencies that lead to other sales directly, but rather builds brand image and goodwill among customers, in hopes that this will indirectly produce sales later on. In other cases, products are sold at a loss strictly to gain market share or monopolize shelf space; profits come from upgrades, add-ons, or other secondary sales.
One of the most common implementations of loss-leader marketing is cell phones. Almost every day I see an ad in a newspaper or magazine advertising a cell phone for free (or some trivially small amount of money), even though I know they cost quite a bit to manufacture. In this case, the “blades” are the monthly service fees. The cell phone company expects to recoup the cost of the phone—and then some—by selling you air time. Distributors guarantee they won’t lose money by building a clause into the contract stipulating that you must pay a “cancellation fee”—in other words, the cost of the phone—if you discontinue service before your contract expires.
Give Away This, Sell That
Any product that requires a service plan, periodic upgrades, or consumable refills is ripe for this type of marketing approach. Satellite TV providers will sometimes install an antenna on your roof and a receiver in your living room for free, as long as you make a one-year commitment to pay for monthly service. Another example is color inkjet printers, which used to be fairly expensive but now routinely sell for well under US$100. Replacement ink cartridges, however, often cost an arm and a leg, in some cases making your total cost per page higher over the long run than if you’d purchased a more expensive laser printer. But my favorite new implementation of “give-away-the-razor-sell-the-blades” comes from the Italian coffee company Illy. Illy offers a subscription program whereby you can receive two to six cans of gourmet coffee in the mail every month. But they also offer a special twist: you can buy a high-end espresso machine at a savings of about US$450 if you commit to a one-year membership. If I didn’t already have an even fancier espresso machine, I’d be all over that program.
It’s not just physical products that work with this sort of scheme either. Countless software developers, Web sites, and internet services follow the same model. If a company is giving away a product for free—whether it’s a Web browser, a news service, music, or whatever—it’s a fairly safe bet that there’s some moneymaking plan behind it, which may very well be a loss-leader strategy. Hmmmm, come to think of it, my company gives away digital products for free—including the very article you’re now reading—in order to produce advertising revenue and promote sales of subscriptions, audio recordings, merchandise, and so on. Has it worked? You’d better believe it. This strategy brings in enough money every month to buy inkjet refills and pay for my coffee subscription. —Joe Kissell