DIFFERENT BUSINESS MODELS
Given their critical importance to achieving competitive advantage, business models are
constantly evolving. It is helpful, however, to introduce some of the more popular business
models today in order to increase the strategy toolkit at your disposal:
■ Razor–Razor-Blade . The initial product is often sold at a loss or given away for free
in order to drive demand for complementary goods. The company makes its money on
the replacement part needed. As the name indicates, it was invented by Gillette, which
gave away its razors and sold the replacement cartridges for relatively high prices. The
razor–razor-blade model is found in many business applications today. For example,
HP charges little for its laser printers but imposes high prices for its replacement cartridges.
Another example is current-generation video game consoles that are sold at a
loss to drive demand for games which are sold at a premium to recoup the loss on the
consoles.
■ Subscription-Based. The subscription-based model has been traditionally used for
(print) magazines and newspapers. Users pay for access to a product or service whether
they use the product or service during the payment term or not. Industries that use this
model presently are cable television, cellular service providers, satellite radio, Internet
service providers, and health clubs.
With the help of a hilarious promotional video that went viral with over 10 million
views, 42 the entrepreneur Michael Dubin launched Dollar Shave Club, an ecommerce
startup that delivers razors by mail. It uses a subscription-based business model. 43 As
the company’s name suggests, its entry-level membership plan delivers a razor and five
cartridges a month for just $1 (plus $2 shipping). The member selects an appropriate
plan, pays a monthly fee, and will receive razors every month in the mail. The entrepreneur
identified the need in the market for serving people who don’t like to go shopping
for razors and certainly don’t like to pay the high prices commanded by market leaders
in razors. The company seems to be off to a great start. After the promotional video
was uploaded on YouTube in March 2012, some 12,000 people signed up for Dollar
Shave membership within the first 48 hours. It also raised over $10 million in venture
capital funding from prominent firms such as Kleiner Perkins Caufield & Byers and
Andreessen Horowitz. It remains to be seen, however, if Dollar Shave Club can disrupt
the $13 billion razor-blade industry where Procter & Gamble’s subsidiary Gillette
holds two-thirds of the world market.
Some companies combine different business models. Telecommunications companies
such as AT&T or Verizon, for example, combine the razor–razor-blade model with
the subscription-based business model. They provide a basic cell phone at no charge or
significantly subsidize high-end smartphones when you sign up for a two-year wireless
service plan. Telecom providers recoup the subsidy provided for the smartphone by
requiring customers to sign up for lengthy service plans. This is why it is so critical for
telecom providers to keep their churn rate— the proportion of subscribers that leave,