Razor Blades: Lessons on Value-Based Pricing | SBI Growth

We’ve told you until we’re blue in the face that pricing has a huge impact on your business. After all, a 1% improvement in price optimization results in an average boost in profit of 11%. Yet, how do you create that 1% change? One method is through your actual revenue model, or how you charge for your product. Although many package structures exist, one of our favorite is the SaaS pricing razor-razorblade model that’s been around for years in retail and creeping up into the software world.

The razor-razorblade model started in the early 1900’s when King Gillette (yes that's his real name) invented the disposable safety razor and revolutionized the shaving industry. He lured people in with sturdy, low-price razors, and then made his fortune by selling his patented high-margin razor blades. (Coincidentally, they were the only ones that would work with his razors.)

This model can be very effective if used correctly (think about the printer/print cartridge industry), but it’s not for everyone. To see which insights will work with your pricing strategy, let’s explore the model’s pros and cons, before drawing some implications about how you can increase revenue by just changing how you charge.

Why people utilize this model

It drives increased market share by being more psychologically appealing

Offering your full product at its full price right up front can be exceptionally expensive to a consumer, especially if there’s no guarantee that they’re coming back to buy more. Fortunately though, the average consumer doesn’t think too far into the future about those future costs, even when buying expensive items like a car. As such, with a razor-razor blade pricing structure you can utilize your “razor” as a loss leader or low margin product to get consumers over that initial price sensitivity hump, all knowing that they’ll be back for more “razors.”

A corollary to this in the SaaS world means making sure you offer a low priced tier that provides value, but ensures the consumer will want more of the product through proper throttling. Pricing along a value metric ensures that happens automatically, as well.

It generates customer loyalty and creates steady revenue streams

The Razor-Razorblade model forces customers to make repeated purchases of the “razorblade” which creates a continuous source of revenue for the companies.This implicitly engenders customer loyalty and creates high psychological switching costs. If you’ve been shaving with Gillette razors for 20 years, it would probably take something more than an extra blade (or 10) on a Schick razor for you to switch over.

In the SaaS world, subscription models offer the exact same advantages. Even if something is being automatically charged to a credit card or an invoice, building the relationship through interaction month after month allows a business to push the switching costs to the max.

It gives your customers freedom

A bit counterintuitive to getting a customer in the door and under some high psychological switching cost, but by allowing a customer the opportunity to keep coming back, you can up and down sell them accordingly. Extra add-ons, premium razors, or even different levels of additional products allow you to serve numerous customers, all with different, but increasing lifetime value.

As long as the “base” is uniform enough, you can give customers the flexibility to choose their own adventure, attracting a larger market...and larger amounts of revenue.

Why some don't use this model

There are two main drawbacks to the Razor-Razorblade model:

It can be risky depending on your business and industry

Companies often sell the “razors” at a loss to gain market share, which means if they don’t sell enough “razorblades” the loss impacts their bottom line directly. This is a huge possibility because there are companies out there that specialize in undercutting the pricing on the “razorblades,” which effectively destroys the entire point of the model. Just think about the businesses and products that popped up to refill your print cartridges, so you don’t have to buy new ones; they’re eating the cartridge manufacturer’s lunch right now.

The consequences of competition may not be as severe in your business, but there will always be people competing with you for the same target market. The way to combat this through pricing is not to engage in a race to the bottom through discounting. Rather, you should keep prices the same but really emphasize your core competencies in your pricing model, add more to your value proposition, or even boost the value of your premium product. This allows you to simultaneously improve your customer experience while differentiating yourself from your competition.

Customers can feel tricked, nickeled, and dimed

This strategy can also destroy customer relationships and loyalty, especially when people don’t understand what they’re signing up for. You see this all the time with magazine subscriptions when people sign up for the free trial and then get upset when the publisher charges them for a year’s subscription after their trial expires.

This demonstrates another important tenet of pricing: be transparent about your pricing structure. Nothing destroys customer loyalty faster than hidden or unexpected expenses so make sure you’re clear about the charges. Plus, this honesty improves your company’s reputation, which will attract referrals and return business.