What Is the Razor and Blades Model and How Do You Apply It?

In February 1900 an odd product rolled out of the Eastman Kodak factory in Rochester: a cardboard box covered in imitation leather. Inside were a simple lens and a roll of film. It cost a single dollar.

It took its name from the "Brownies", the little sprite characters made famous by the children's books of Canadian author Palmer Cox. And it was aimed at children. Yet twelve years earlier, in 1888, the first Kodak camera had cost 25 dollars. It came loaded with film for 100 exposures; when you had used them up, you posted the camera back to Rochester with 10 dollars, and your prints came back along with the camera, reloaded with a fresh roll.

In 1900, its first year of production, more than 150,000 Brownies were shipped. According to accounts of Kodak's history, the camera had been designed from the start to sell Kodak's roll film. George Eastman had seen that the profit would come not from the camera but from the film it would get through for years. The cardboard box was a door; the real business was what the people who walked through it bought again every month.

What is a cinema really selling?

Today this arrangement is called the razor and blades model: you sell one product cheaply, even at a loss, and make your profit from the complementary product that has to be bought again and again alongside it. Printers and cartridges, coffee machines and capsules, games consoles and games are familiar examples.

The tastiest example, though, is at the cinema. Zachary Crockett, a writer at The Hustle, came across the model while investigating why cinema popcorn is so expensive. According to Crockett, cinemas hand over an average of 70 per cent of ticket revenue to film distributors. In a film's first weeks the share is even higher. Every penny from the concession stand, however, stays with the cinema.

The figures Crockett cites are striking: in 2018 the cinema chain Cinemark made 1.1 billion dollars in concession sales, which cost it 181 million dollars. The ticket is what gets people through the door; the popcorn is the revenue that keeps the cinema going. An old saying that does the rounds in the industry sums it up well: find a good place to sell popcorn, then build a cinema around it.

Finding the razor and the blade in your own business

This model doesn't suit every business, but it makes every founder ask one question: does my customer buy from me once, or do they come back? If it's the latter, you can set your price around the whole relationship rather than a single sale.

Make the door cheap and the repeat profitable

An earlier pocket model from Kodak had cost most families in Britain almost a month's wages. The one-dollar Brownie removed that barrier. If the entry price of your product is stopping customers taking the first step, you can make that step easier and shift your earnings to later purchases. Trial packs, cheap starter devices and low set-up fees are small versions of the same logic.

But do the maths first. Every customer who comes through the door at a loss has to stay long enough to pay that loss back. If the repeat purchases don't materialise, you are left with a pile of razors you gave away cheaply.

Protect the blade

The model only works if you are the one selling the complementary product. If someone else can sell the same blade at half the price, the cheap razor you handed out sends customers to your competitor. That is why companies built on this model invest in compatibility, quality and proprietary design. If you don't know what protects your repeat product, your model isn't protected either.

Don't make customers feel cheated

Crockett recounts how, in 2012, a 20-year-old customer in Michigan sued the cinema chain AMC over its concession prices, and the case was dropped. The lawsuit failed, but the anger lingers. The wider the gap between the price of the complementary product and the value the customer gets, the more likely they are to buy elsewhere, or not come at all. Refillable popcorn buckets and subscriptions are cinemas' attempts to soften that anger.

When the blade goes out of date

Kodak's end shows the dark side of the same model. In 1975 one of the company's own engineers, Steven Sasson, built the first prototype of a battery-powered, handheld digital camera, at Kodak. But while film was bringing in high profits, executives shied away from a decisive move into digital. Film sales fell, and in January 2012 Kodak filed for bankruptcy protection. A company so attached to the blade noticed too late that the razor had changed.

Something on the wind

The Turkish word for "free", "bedava", has something to say about this story too. According to the Nişanyan etymological dictionary, it comes from the Persian expression "bād-ı havā": "bād" means wind and "havā" means air. The phrase meant "a puff of wind", in other words something worthless. Other dictionaries trace it to an expression meaning "brought by the wind". Either way, "bedava" is something that comes without being paid for.

In the razor and blades model, though, nothing comes on the wind. The cost simply moves somewhere else. Economists call this price discrimination. In The Economics of Welfare, published in 1920, the British economist Arthur Cecil Pigou classified the degrees of selling the same good to different buyers at different prices.

A study Crockett cites shows how cinemas do it. Ricard Gil of Queen's University and a colleague examined five years of data from a cinema chain and found that the people who cared most about a film were also the ones who bought the most at the concession stand. The ticket is sold to everyone at the same price, but popcorn becomes a quiet way of charging more to the customers who value the experience most.

A small leak

In The Way to Wealth, written in 1758, Benjamin Franklin has Father Abraham tell readers that what is spent on a little tea, a little punch and the odd small entertainment may seem trivial. Then he recalls a saying from Poor Richard's almanacs:

"Beware of little expences; 'A small leak will sink a great ship,' as Poor Richard says."

Watch the small outgoings; a tiny leak can sink a mighty ship. Franklin was saying this to the customer. The founder stands at the other end of the same leak: the small sum a customer pays every month without noticing may be your business's real source of income.

In your business, which is the razor and which is the blade? And on the day your customer notices that small leak, will they still want to stay?

If you're curious about the basics of pricing your product, take a look at Pricing for Startups: How Do You Price Your Product?