The story of Gillette and the famous "razors and razor blades" business model is legendary at this point. The story goes that King Gillette revolutionized business by coming up with the strategy of selling razors cheaply, but then locking people in to expensive disposable blades, where the margin existed. This strategy has become so well-known that it's mentioned all the time and seen in lots of other industries as well, especially the technology industry. It's seen as the basis for console video games (consoles cheap, games expensive), printers (printers cheap, ink expensive), mobile phone service (phones cheap, service expensive), etc.

Of course, various business strategists who discuss the razor-razor blade business model suggest that there are some key rules to making this work: for example, many feel that there needs to be some level of lock-in, that prevents competitors from entering the high margin part of the market. That is, if someone else can just sell the high margin razorblades, then why would Gillette make the low margin (or negative margin) razors, since customers might just go elsewhere for the blades?

Well, it turns out that an awful lot of both the history and the theory turn out to be totally wrong when it comes to Gillette and the razor/razor blade market. Felix Salmon points us to Randy Picker's latest paper, which explores the myths of the razors-and-blades story as it applies to Gillette -- and the counterintuitive reality of what actually happened. I don't think the real story is quite as surprising or confusing as Picker makes it out to be -- other than the surprising fact that the common "story" we've all heard turns out to be wrong.

What Picker found, first of all, is that Gillette really didn't use the cheap razors and expensive blades strategy at all in the early years. In fact, it went the opposite direction, and charged an extremely high price for the razors. While other razors went for closer to $1, Gillette charged $5 for its razor (with a set of 12 blades). As Picker notes, this represented about 1/3 of a week's wages at the time, and made it a luxury item. While there were some convenience factors, other safety razors entered the market soon and charged a lot less than Gillette for both razors and blades... and Gillette kept its prices high.

And here's where patents enter the story.

Gillette received patents in 1904 on both the razor and the blade. As Picker notes, conventional wisdom would suggest that this is the perfect point for Gillette to have used the famed razors-and-razor blades strategy, since it could use the patents to exclude competitors from offering compatible blades. But, it did not. The same "conventional wisdom" would then argue that once the patents expired, and others could offer compatible razors, the razors-and-blades strategy would not work. And yet, it was after the patents expired and when there were compatible blades on the market that Gillette finally went to this form of strategy.... and its sales and profits shot up.

Picker suggests that none of this makes sense. He says without exclusion via things like patents, a razors-and-blades strategy shouldn't work, because there would be no lock-in on the platform (razors), and there would be competitors who would just offer the blades, undercutting Gillette, which would have to eat the costs on the cheap razors. Meanwhile, without the lock-in, users could just jump ship to a competitor at will, since the platform was so cheap.

I'd argue, however, that it actually makes perfect sense, the more you think about it. With patents, Gillette priced the razors (and, potentially, the blades) artificially high, creating a smaller, artificially limited market. This has long been our complaint with patents in general. Once the patents expired, and actual direct competition became more of an issue, then Gillette finally had to price to the market, capturing a much larger segment of the market, driving up revenue and profits because of it. As for why once the patents were no longer a serious issue, this strategy still worked, I think Picker underestimates both the value of brand loyalty and convenience, as well as mental transaction costs.

That is, even if others offer compatible blades for Gillette products, people are generally loyal to the overall platform brand if it hasn't done them wrong. Not everyone will be, of course. There will always be some pure price shoppers who look for the best deal. But many people will remain generally loyal to Gillette, and with more customers coming in due to market pricing, the net benefit could be much greater. On top of that, people don't want to have to worry about whether or not the blades will really fit or really work as well. They're likely to feel more comfortable going with the brand name that is the same as the razor maker, knowing that it will work, and that there's a level of quality involved. Choosing a different brand of blade involves risk and mental transaction costs that many users just won't want to bother with.

The whole thing is quite fascinating in thinking about these kinds of business models. Printer companies, especially, might learn a thing or two, as they've now become quite aggressive in using patents to block competitors from offering compatible ink cartridges or ink refills. But, the example of Gillette suggests they could be better off not fighting it, but focusing on providing better quality that doesn't annoy users quite so much.

Separately, I should also note that this is why I think that the classic (now, apparently mythological) Gillette razors-and-blades business model is not quite the same as the business models I suggest when it comes to infinite and scarce goods. That's because the classic Gillette story (as opposed to what really happened, apparently) would require lock-in. But the give away the infinite and sell the scarce setup is to not worry about lock-in, since that tends to piss people off, but rather focus on providing value so that people are comfortable buying from you -- which seems to be a bit closer to what actually happened with Gillette.

Last month, we talked about how the new Freakonomics movie was going to flip the traditional windowing methodology, and get released online before it was in theaters. At the time, Stephen Dubner warned that there was also going to be another "wrinkle" in how they released the movie. I'm not sure if this is it, but it's been announced that there is going to be a special "pay what you want" screening in select cities (Los Angeles, San Francisco, Washington D.C., Chicago, Boston, Dallas, Philadelphia, Denver, and Seattle). Free isn't an option, however. The prices range from $0.01 to $100, and you also have to answer some survey questions. I'm always a little hesitant to buy into straight "pay what you want" deals, because I don't think they represent much -- and I worry that people read too much into the results of any particular experiment, especially when little is done to give people a real reason to buy on top of the content. So, to some extent, I worry how Levitt and Dubner might interpret any results from this experiment.