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5/31/2007
04:28 PM
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The Razor-Blade Strategy

Have you heard about the razor-blade strategy (also called, according to Wikipedia, the "bait and hook model")? The idea is that a company sells you a razor for next to nothing -- or gives it away for free. Great deal, right? You get the razor, and the manufacturer gets to sell you high-cost razor blades for the next few years (or, at least, for as long as you use the razor), making a lot more than was inv

Have you heard about the razor-blade strategy (also called, according to Wikipedia, the "bait and hook model")? The idea is that a company sells you a razor for next to nothing -- or gives it away for free. Great deal, right? You get the razor, and the manufacturer gets to sell you high-cost razor blades for the next few years (or, at least, for as long as you use the razor), making a lot more than was invested in the initial device. Now, how many tech products can you count that follow that same marketing strategy?The first -- and most obvious -- answer is printers. The price of laser and inkjet printers has taken a huge dive in the last few years, to the point that several PC manufacturers (such as Dell) are giving away basic printers as incentives. However, the cost of supplying those printers with ink or toner cartridges has remained high -- and so profitable that printer manufacturers have dragged would-be third-party suppliers through the courts for years, trying to maintain a semi-monopoly on the cartridge supply. They are slowly being forced to share the field (check out our special report on The Cartridge Wars), and as a result, consumers are now being offered legitimate third-party cartridges and refills. But it was a long fight.

Okay, what else? Give up? How about your cell phone?

My colleague Eric Zeman has already commented in his blog on the study by J.D. Powers that says that Americans are opting for less expensive cell phones and holding on to them longer. They're able to do this because phone manufacturers are subsidizing the cost of the phones in order to get people to purchase long-term contracts -- and as a result, many of us are using older models with less snazzy features. "People won't know what to do with themselves if they have to actually fork over some cash for their phones," he concludes.

He's right -- if I had to pay the full retail value for my basic cell phone, I'd be a bit peeved. But it wouldn't be because I'm not used to forking over cash to the phone companies. Anyone who owns a cell phone that is not supplied by their employer knows that, no matter what kind of monthly fee you contracted your service for, it will go up steadily month by month through the use of increased taxes, surcharges, added fees, and dozens of other little unannounced costs. So I suspect -- and I'm sure many other consumers do likewise -- that no matter how subsidized that little phone is, the company that supplied it makes up the difference one way or another by the time that two-year contract is over. Another razor sold.

Take my own case. My low-cost, older-model cell phone took an inadvertent (and fatal) dip in the Atlantic Ocean over the Memorial Day weekend -- about three months before my two-year contract was up. Am I running out to buy a market-price $600 Treo so that I can make calls, check my e-mail, surf the Web, and contribute to the health of the economy? In my dreams, sure. But what I'm actually doing is buying my old model on eBay for about $25 so that I can afford something a little better once September rolls around.

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