Photo: Zino Davidoff. Source: Wikimedia
One of the most unpleasant tasks of my morning is shaving with a dull razor. It’s painful, unpleasant, and I nick myself all the time. 100 years ago, people would put up with dull blades for a long time, rather take the chance of cutting themselves and getting infected. Sharpening a straight razor is delicate. The blade has to be honed and stropped on a leather strap to remove any burrs or bends in the blade.
Straight razors went out of fashion when a tinkerer named King Camp Gillette thought of a way to make blades so thin and inexpensive enough that folks could just throw them away. But he couldn’t charge enough to sell his blades profitably. Ultimately, he came up with the idea of giving away a specialty handle – one that would only fit Gillette’s special blades. After a few months, he would recover the cost of the handle, then make sizable profits. In a few years, his business model dominated the marketplace, and Gillette became extremely wealthy. He gave away his razor so people could throw away their dull blades.
Today, Gillette’s notion of loss-leader marketing is everywhere. Microsoft sells the Xbox console below cost and makes a profit on the games; Amazon sells its Kindle e-readers below their cost to make money on the books; Costco sells discounted gas and tires at its stores to encourage members to fill up and then load up. With the rise of platform economics, loss-leaders are an essential part of most strategies.
Facebook gives away its social networking; Google gives away the Android OS and its search function, Uber and Lyft give away their ride-sharing apps; banks give away checking and bill-paying and budgeting software; all with a view towards gathering participants and using their data. It’s not just tech companies. Over three quarters of executives across the economy now see platform-based business models as their core growth strategy.
Since the goal is to get consumers onto a platform, loss-leaders are more important than ever. Gillette never could have imagined his razor blades would blaze the trail for our online economy.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”