DailyDime

Give away the razor at cost and get rich on the blades. See how the razor-and-blades model works, who runs it best, and why the customer lock-in matters more than the price.

In my experience as a founder, the smartest moves I’ve ever made is picking industries where customers pay every single year. Twenty years and dozens of investments later, my thesis hasn’t changed… recurring revenue businesses are the best.

If you sell ties or shoes, you must keep selling ties or shoes each to generate revenue. There’s certainly nothing wrong with that, but you must keep generating new sales to survive. Tastes change. New competitors enter markets. It can be tough to maintain growth.

Juxtapose that to insurance where you get a new customer and, unless you fail miserably, they will stay with you year after year like clockwork.

Making money while you sleep with recurring revenue is awesome. Your risk is lower. Your stress is lower and your business is more valuable if you ever sell.

But, what if I told you there was another level better from recurring revenue business models? What if I told you the holy grail of revenue models in business were razor-and-blades models? You may of hear of them, but what makes them special?

What is a the Razor-and-Blades Model?

You don’t have to use your imagination too much, just think about your morning shaving routine. You buy a razor with a blade for $8, which seems reasonable. But to get new blades, they cost $35 for five. It suddenly dawns on you that your razor costs $1 but the blade costs $7. That’s crazy right?

Urban legend is that the Gillette company invented the razor-and-blade model, but that’s not true. In fact, Gillette blew it in the early 1900’s when their patent expired (you can read about that here). But that’s beside the point, the concept of the razor-and-blade model is very real and the economics are undeniable.

How it works

A company decides to deliberately underprices or subsidizes the initial hardware or platform to lower the barrier to entry and acquire customers quickly.

Once the customer owns the “razor” they are effectively locked into buying the proprietary or compatible “blades” (pods, cartridges, filters, ink, games, etc.).

High switching costs, brand loyalty, or proprietary designs protect the recurring revenue stream.

The economics flip: customer acquisition is expensive and low-margin (or negative), but lifetime value is high because of the stream of consumable purchases.

This is the opposite of a pure product-sale model, where the company aims to maximize margin on every unit sold upfront.

Examples

Regardless of the origins, the concept of razor-and-blades has endured and expanded into many industries. Here’s a sample to help illustrate my point.

Razor Blades

The original, and ironically the cautionary tale. Gillette rode blade margins for a century, and P&G paid $57 billion for the company in 2005 largely to own that recurring blade revenue. Then Dollar Shave Club showed up in 2012 with a viral video and $1 blades shipped to your door, and Harry’s followed right behind. Gillette’s US market share dropped from around 70% to roughly 50% in under a decade. Here’s the problem: there was never a real lock. Nothing stops a competitor from selling you a different handle and cheaper blades, and once the internet removed the drugstore shelf as a barrier, the whole margin structure collapsed. Unilever bought Dollar Shave Club for $1 billion in 2016. The blade money is real, but only if nobody can undercut your blades.

Printers

The most shameless version of the model ever built. HP will practically pay you to take a printer home, then charge you ink that works out to over $1,000 per gallon. That’s more expensive than vintage champagne. They even push firmware updates that reject third-party cartridges. The printer isn’t the product. The printer is the hook.

Coffee Pods

Keurig sells you a $79 machine, then you spend $600 a year on pods without ever doing the math. Here’s the fun part: when Keurig’s pod patents expired in 2012, knockoff pods flooded in, and Keurig tried to fight back with a machine that literally rejected unlicensed pods. Customers revolted. Lesson learned: the blades only stay expensive if customers can’t buy them somewhere else.

Video Games

Sony and Microsoft lose money on every console they sell at launch. On purpose. They make it back with a 30% cut of every game sold on the platform, plus $70 titles and monthly online subscriptions. And unlike razor blades, your game library locks you in. Switch to the other console and every game you own becomes a paperweight. This is the razor-and-blade model perfected.

Electric Toothbrushes

Philips sells you a $150 Sonicare, then replacement heads run $10 a pop and cost pennies to make. You could buy generic heads on Amazon for a fraction of the price, but most people won’t risk their expensive handle on a knockoff. Fear is the lock here, and it’s a profitable one.

Water Filtration

I know this one personally from my time in the water filtration business. The under-sink system is the customer acquisition cost. The replacement filters, which need swapping every 6 to 12 months, are the actual business. Get a customer on a filter subscription and you’ve turned a one-time hardware sale into insurance-style recurring revenue. The whole game is the reorder.

Medical Devices

Glucose meters are cheap or free because the test strips carry margins north of 70%. And this category has the strongest lock of them all: the FDA. A competitor can’t just sell strips for your meter without regulatory clearance, and insurance companies contract for the name-brand consumable anyway. It’s the razor-and-blade model with a government moat around it.

E-Readers

Amazon sells the Kindle at roughly break-even and makes its money on the books. But here’s the twist: the lock isn’t the consumable, it’s your library. Every book you buy is locked to the platform, so leaving Kindle means abandoning hundreds of dollars of content. Razor blades get used up and thrown away. A digital library just keeps growing, and so does the cost of walking out the door.

It’s All About Profit

Here’s the punchline running through every example: the hardware is a rounding error, and the consumable is the entire P&L. Gillette’s blades, HP’s ink, and those glucose strips all carry margins the initial sale could never touch. One $79 Keurig becomes roughly $3,000 of pods over five years at the $600 a year clip. The machine sale was never the point.

In effect, the razor-and-blade model lets a physical product company borrow software economics, which is why the hardware vs. software margin gap is worth understanding first. You eat a thin or negative margin once, then you collect high-margin reorders for the life of the customer. The refrigerator company starts every January at zero. The blade company starts with a warehouse full of future reorders already spoken for.

The profit shows up one more time when you exit. Buyers pay a premium for predictable revenue, which is why recurring models drive the multiples that matter when you value a small business. P&G didn’t pay $57 billion for razor handles. It paid for a century of blade reorders it believed would never stop.

The Pattern: It’s the Lock, Not the Price

Look back across those examples and the pattern jumps out. The pricing part is easy, since anybody can sell cheap hardware and expensive refills. The lock is the hard part, and the lock is the entire difference between Gillette’s collapse and Sony’s empire.

Rank the locks and the list explains itself. A government moat like FDA clearance is nearly unbreakable. A game library or Kindle library gets stronger every year the customer stays. Printer firmware holds until someone gets annoyed enough to fight it, fear protects toothbrush heads, habit protects filter subscriptions, and patents protect pods right up until they expire. Gillette had none of the above, which is why a viral video and $1 blades took 20 points of market share. Disruption always finds the unlocked door, and it’s the same force of creative destruction that killed Blockbuster.

Before you fall in love with the model, ask one question: what stops a competitor from selling my blades? If the honest answer is nothing, you don’t have a razor-and-blade business. You have a head start.

Find Your Blade

If you run a company, spend ten minutes this week on one exercise. Write down what your customer must buy from you again within the next 12 months. If the page is blank, that’s your product roadmap, because a refill, a filter, a service plan, or a subscription tier turns a one-time sale into the banked January 1st revenue we started with.

If you’re investing or buying instead, price the lock, not the story. I’ll take a boring consumable with a real moat over a sexy gadget with none, every single time. My razor still costs $1 and the blades still cost $7. Somebody is getting rich off that math. It might as well be you.