Razor and Blades Model

The profit margin on Keurig machines is very low and sometimes even negative. On the other hand, the K-cup coffee pods have much higher profit margins.

The business model: sell one item at break-even or for free to increase the sales of the complementary good. This is the “razor and blades” model. (Despite being named after the safety razor industry, early companies like Gillette didn’t initially follow this model).

This model works especially well when there are switching costs or vendor-lock in. If there are no switching costs, other providers can come in and compete margins away from the complementary good. When the K-cup patent expired in 2012, prices came down when competitors started producing compatible pods.

Or when a producer owns a monopoly on the complementary good. John D. Rockefeller and Standard Oil gave away eight million kerosene lamps. Demand for kerosene (conveniently sold by Standard Oil) skyrocketed.

Some other examples of the razor and blades model:

• Kindle e-reader / digital books.

• Video game console / video games

• Mobile phone / cellular data plan

• Electric toothbrush / replacement brush heads

• Printers / ink cartridges

• E-cigarettes / e-cigarette pods