In recent years the old razor-blade model has returned in different sectors. This model is based on the idea of selling cheap razors and profiting from the highly priced blades. This concept isn’t new, but it’s interesting to see more companies basing some or all of their business on this model. Is this model profitable? What are the perils companies may face when using this model? How can companies sustain this model over time? Let’s try to answer these questions by analyzing several companies that have implemented this model.
Kindle and E-books
During the past several years Amazon.com, Inc. (NASDAQ:AMZN) has been slowly augmenting its market share in the tablet market by selling its Kindle fire brand. Before Kindle fire, the company used Kindle to hook its customers to buy its E-books. The prices of Kindle and Kindle fire aren’t high compared to other tablets. This move may have helped increase its E-books sales and perhaps even take on other competitors, such as Barnes & Noble.
Despite the low price of Kindle, Amazon’s market share was only 3.7% in tablets in the first quarter of 2013 (based on IDC). In the first quarter of 2012, its market share was 3.6%. Nonetheless, sales continue to grow as worldwide shipments grew by more than 157% (year-over-year).
The company’s near dominance in the E-book market is enabling Amazon to make its profits from E-book sales. Moreover, the shift to E-books has also enabled Amazon.com, Inc. (NASDAQ:AMZN) to become a self publisher and by doing so eliminatted the role of publishers. Since it’s easier to purchase an E-book from a tablet than a regular book, this could partly explain the rise in the number of e-books Americans read compared to books. According to one survey, Americans who read E-books read 24 books a year, compared to 15 books for non-e-books readers. One of the reasons for Amazon.com, Inc. (NASDAQ:AMZN)’s success is its dominance in the book market that helped the company compete with other E-readers such as Barnes & Noble’s Nook. So it seems that Amazon is benefiting from its business model. Let’s see how other companies have done with this razor/blade business model.
Turning to beverages
Sodastream International Ltd (NASDAQ:SODA) has also been implementing the razor-blade model. The company has been selling its soda maker kit at almost no profit but its soda supplement products, such as refill gas canisters and flavor packets, at a high profit. How is the company doing?