I’m at the point in my pricing class where I go on about the pricing of razors and blades. The widespread belief on this matter is captured by the following quote from Chris Evans, the author of a book called FREE.
Gillette made its real profit from the high margin on the blades.
Price razors low and make one’s living off the blades. Replace razors by aircraft engines and blades by parts or razors by game consoles and blades by games and you have a universal prescription. Does it make sense?
Suppose, initially, a monopoly supplier of razors and blades. Each razor will last 52 weeks and a pack of blades will last 4 weeks. Suppose a weeks worth of shaving to the buyer is worth $10. How could I price the razor and the blades? First, razor at $480 and blades free. Second, razor for free and pack of blades at $40. Third, any combination of the two that sucks out $480 from the buyer. In the absence of other considerations there is nothing to suggest price razors low and blades high is better than the reverse. If the buyer is liquidity constrained, high priced razor and low priced blade might be a bad idea. High priced razors and low priced razors also raise the possibility of hold up because after I sell you the razor, what is to stop me from jacking up the price of the blades?
OK, suppose one has settled on low price razor and high priced blade. This makes you vulnerable to a competitor with a lower priced blade compatible with your razor. If they enter, you would respond by raising the price of the razor and lowering the price of the blade. In this case, what about a competitor entering with a razor compatible with your blades? Now the competitors have you coming and going!
Well then, the problem appears to be the interoperability of razors and blades (maybe not, but that comes up later in the class). So, design a razor and blade system incompatible with the competitions. Now one is selling a system rather than the individual components. So, price the system rather than the individual components.
What then is the origin of the low priced razor high priced blade wisdom? Haven’t the faintest. If we turn to reverent authority, King Gillette, he introduced the razor and disposable blade around 1904. The razor and a pack of 12 blades sold for $5. Subsequent packs of a dozen blades were sold for $1. At that time, $5 was about 2 days wages for the average factory worker!