Should We Be Giving Away Digital Razor Blades?

from the business-models-a-la-Gillette dept

One of the most famous "business models" ever invented is the Gillette razor blade - which is that you sell the razors at a loss but make up your money by selling the blades. Lots of companies have bought into this concept and have tried offering various "loss leaders" to encourage purchasing other (higher margin) products. In fact, many technology companies have tried to use this strategy (though, they often forgot the second part - the high margin part - and just gave stuff away). Now some economists have taken a look to see what factors make this a reasonable business model. It seems pretty straight forward and obvious. The stuff you're giving away should have a very low marginal cost of production (which basic economics would suggest you should be selling at a price close to zero anyway). Then, the "high margin" component needs to be very closely tied to the give away product. In other words, the free product shouldn't be particularly valuable without the additional (costly) part. It took economists to figure this one out? Seems pretty obvious to me. Still is an interesting read, though.

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