Sodastream International Ltd (SODA), Amazon.com, Inc. (AMZN): The Return of the Razor-Blade Model – Is it Working?

So far, Sodastream International Ltd (NASDAQ:SODA)’s financial results are impressive with steady growth in revenues and a reasonable profit margin of over 10%. The company isn’t facing direct competition (for now) from the big players such as Coca-Cola. And unlike Amazon, if SodaStream will face strong competition this could result in a knock out for this company.

This means if a company is using the razor-blade model and doesn’t have competition (such as SodaStream) or has a strong market share to begin with (such as Amazon) the model works fine. Because these companies aren’t selling something unique that others can’t sell (as oppose to Pharma companies that sell non-generic treatments) the business model relies on market conditions to determine its success. But if Sodastream International Ltd (NASDAQ:SODA) will face competition down the line, it could face big problem in maintaining customers. On that note let’s turn to another company that uses this model: Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR).

The coffee maker

Many criticized Green Mountain for relying on its K-Cup patent that expired last September. Green Mountain’s “razor” is the coffee maker and the “blades” are the K-Cups. Since the expiry, generic companies were able to sell cheap coffee packs and thus eliminating the high profitability of the company. Nonetheless, in the first quarter of 2013 its profit margin grew to 21%. In comparison, in the first quarter of 2012 its profitability was only 17%. The company’s collaboration with Starbucks, which was extended to a five-year agreement, is likely to further insure GreenMountain’s standing. Therefore, up to now, the company’s business model is still maintained.

The Foolish Bottom Line

The razor/bladed business model is an interesting strategy that could be profitable over long period of time if the company has a strong hold on the market (as Amazon.com, Inc. (NASDAQ:AMZN)) or collaborates with big partners (as Green Mountain). Finally, if a company such as SodaStream isn’t able to protect its business from competition by the above mentioned measures, its business model might not sustain over time and its core business could fall to stronger competitors.

Lior Cohen has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Green Mountain Coffee Roasters, and SodaStream. The Motley Fool owns shares of Amazon.com and SodaStream.

The article The Return of the Razor-Blade Model – Is it Working? originally appeared on Fool.com.

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