Give away the razor, sell the razor blades! – Part One
To give a quick background (while respecting the NDA) Zeebo, Inc. is a very successful company in San Diego run by some of the smartest people I’ve known. And I worked with their Indian spinoff Zeebo India, a joint venture among Zeebo Inc, Qualcomm & Lakshya Digital. We were building a low cost edutainment console which allowed online gaming & it used 3G to download new games/levels from the central server.
We had 3 broad choices –
1. Sell it at a one-time cost, closer to the price of a tablet & let the user worry about the mobile network for 3G.
2. Partner with a cellular network & sell the network-locked device at a lower price. Let the cellular provider bill the users and take a cut from monthly bill.
3. Collaborate with several 3G providers and allow their SIM cards on our devices. Sell the device at a minimal price, charge them a fixed monthly subscription fee and pay the 3G providers based on individual usage.
We rejected the first option immediately because we knew our users won’t pay a higher price for a gaming device while Xbox and PlayStations come so cheap. Although we knew we were into a different market segment, we were sure our users will compare the two. The other two options were vaguely similar and were essentially “give the razors away, charge for the blades” models. But before I could research any further, unfortunately a lot of things went wrong and we had to pull the plug on the project.
Recently I was looking at a friend’s Kindle Fire when this came to my mind. I’ve always known it’s price but had this idea that it’s just an inferior notebook which displays bad graphics and can only be used for viewing black and white text. And that’s how I justified it’s low pricing. But within minutes of using it I realized that I was wrong. Kindle is a great device. Well designed and well suited for it’s purpose. My interest in pricing strategies got rekindled (I suck at making puns).
A friend suggested me to look at how the printer cartridge industry works, which I did. The printers are sold dirt cheap, often at a loss or no profit margins. And they make money by charging for the ink cartridges. It’s a win-win. The printer company makes money and the buyer gets the printer for cheap. 60% of HPs total profits are generated through sales of ink. That’s huge, right?
When I dug deeper, I found more and more variations of the same model. The razor industry is an obvious example. Apple does this for iPhone by tying up with AT&T and Verizone, web hosting companies don’t charge for account setup anymore, Amazon sells storage for dirt cheap prices and charges for support, online gaming companies like Zynga have made their games freely available and make money through in-app purchases, Barbie sells dolls for free & charges for accessories, film manufacturers sell super-cheap cameras & battery manufacturers sell (or rather give away) flashlights.
While it seems obvious, it’s exactly opposite to the traditional recurring revenue model. For instance a Macbook is sold at a higher price but the OS upgrades are cheap.
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