Gillette is one of the most revolutionary companies of the 20th century. It is one of those very few companies that have survived for more than 120 years which includes more than 7 revolutions and 2 World Wars. But what is more fascinating about Gillette is not the growth of the company, but the fact that Gillette gave the world a billion-dollar idea. And this idea laid the foundations of success for some of the biggest ventures on the planet which include PlayStation, Xbox, Kodak, and even Amazon Kindle.
The question is – What exactly is this strategy? And how did a razor company go on to inspire legendary products like PlayStation and Xbox? And more importantly, how can you apply this strategy to your start-ups? The answer to this question lies in the history of the Gillette company which dates back to the late 1800s. In this article, we will see the complete Business strategy of Gillette which makes it a billion-dollar company.
The history of the Gillette brand
This was the time wherein the trend of dense beards was fading away and the trend of a clean-shave mustache look was on the rise. But back then shaving was not an easy task it was even considered to be a dangerous undertaking. In the late 1800s if you wanted to shave you had only 2 options. The first option was a straight razor and the second option was a safety razor.
The straight razor are the ones that looked very similar to the ones you might have seen in Game of Thrones. And they were considered to be very risky because they were super sharp and people were kind of scared to get them too close to their face or their neck. On the other hand, the safety razor was like a one-time purchase but once you bought it you had to keep sharpening it frequently and that was a very tedious procedure. So, the men of the 19th century had to seek professional help and they visited the barber shop 2-3 times every single week.
One fine day, a traveling salesman was getting late to work and he got extremely fed up with using his life-threatening razor. And he had completely lost his patience to keep sharpening the safety blade every time he wanted to shave. That’s when he thought, why not have a razor with a detachable, disposable blade that can just be thrown away after every shave and replaced with a new one? And that is how the modern razor blade was invented.
This angry, pissed-off salesman was none other than Mr. King Gillete himself and his vision gave birth to the revolutionary invention of disposable blades which then carried on to change men’s grooming forever. King Gillette collaborated with his friend and got a patent for their razors and their blades, which is why nobody in the market could mimic their iconic design. And that is how for the next 15 years Gillette remained a market leader and became a million-dollar company.
The Razor and Blade Model
But you know what? Things started to change in 1921. This year, the Gillette razor blade patents expired. Within just one year. Every single Gillette competitor was making a similar pair of razor blades and this put Gillette into deep deep trouble. And this was clearly reflected in their sales numbers as well. From 1921 onwards, the sales of Gillette razors saw a massive decline of 20% in just one year, which is like a crazy downfall for a company that had been a market leader for more than a decade. Now, here’s where they really needed to do something magical to save the company from failing. And that is when they came out with a pricing model called the Razor Blade model. And this model went on to change the very dynamics of the razor business forever.
The Gillette ecosystem
This model was based on a very simple philosophy wherein they said, ‘Let’s sell the razors at an ultra-cheap price with low margins and then sell the blades at a higher margin. So that, when the customer keeps buying the blades, we can have a recurring profit from each customer. Basically, in one line it meant, “Give them the razors and make them come back for blades”. So Gillette started selling razors at an ultra-cheap rate to compete with the competition and sometimes they even sold it at a loss, just to get people into the “Gillette Ecosystem”.
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Within a year, sales of Gillette razors shot up. After 1922 when the razor blade strategy was fully implemented, the sales of Gillette razors skyrocketed by a humongous 127%. Gillette jumped from seeing a 20% decline in its sales to seeing a massive increase of 127% in just one year because of the execution of the Razor Blade strategy. And that is how Gillette established a legacy in pricing and today, even after 100 years, it still serves as an inspiration for some of the most iconic brands of the 21st century. And the Razor Blade model, even today, is taught extensively in B-schools all around the world.
Today Sony uses its pricing model and sells its PlayStation consoles at a loss, just so that they can make recurring profits through CDs and PlayStation Plus subscriptions. In fact, Sony incurred a loss of about 60$ which is about ₹4200 for every PS4 console they sold, just so that they could make billions through CDs and subscriptions. For decades Kodak sold cameras at a remarkably low cost to entice customers to purchase film rolls, and for years the Amazon Kindle has been sold at almost 0% profit so that Amazon can make billions from its e-book sales. This is the power of the Razor Blade model.
The lessons we can learn from Gillette
So now the question is how can you apply this model to your startup. There are 3 important lessons that you need to keep in mind while you apply this strategy for your startup. The first thing that you need to understand is that getting your customers into your ecosystem will always give you an unfair advantage over your competition because an ecosystem always results in massive customer retention.
Secondly, while you apply this model you need to find the points of maximum reluctance and then you have to work on minimizing it. For example, you would be more reluctant to buy a PS4 console as compared to buying PS4 games after buying the console. Therefore, selling consoles at a loss and hiking the price of the games will give you exponential returns as compared to doing it otherwise.
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Thirdly, you need to be careful to not be so dependent on this model that you end up neglecting the very possibility of disruption because this is exactly what happened with Kodak. Kodak was so stuck to making money by selling their film rolls that in spite of being one of the first companies to file a patent for digital cameras, they did not realize that the film roll itself will seize to exist with the rise of the digital revolution. And the fact that by sticking to the razor blade model, they were practically digging their own grave. And last and most importantly, every entrepreneur needs to realize that pricing is a double-edged sword. When used right, it will give you incredible returns but if you don’t keep the track of the changes, it can even kill your business.