Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Gillette Lost Its Pricing Power
Transcript
- Lucas: So back in 2010, if you walked into any drugstore in America and needed a razor, you had basically two choices: buy a Gillette or buy a Gillette. They controlled something like 70 percent of the global market. And they had the pricing power to match. Luna: Seventy percent — that's dominance. And the prices were eye-watering. I remember paying thirty-five dollars for a pack of four cartridges. Lucas: Right. And that was by design. Gillette's entire business model — the famous 'razor and blades' strategy — was built on selling the handle cheaply, sometimes at a loss, and then making enormous margins on the replacement blades. We're talking gross margins north of 90 percent on blades. Luna: Ninety percent? That's higher than software. Lucas: It's one of the highest gross margins in any physical consumer product. And it works — until it doesn't. The thing that made Gillette so profitable was also what made it vulnerable. They kept adding features: five blades, then a lubricating strip, then a vibrating handle. Each innovation justified a higher price. But the incremental benefit to the consumer got smaller and smaller. Luna: So they were raising prices, but the perceived value wasn't keeping pace. Lucas: Exactly. And that created an opening. Enter Dollar Shave Club in 2011. Their pitch was brutally simple: blades are overpriced, we'll send you a decent one for a few dollars a month. No fancy handle, no vibrating motor. Just a sharp blade in a cardboard box. Luna: Their launch video was legendary. 'Our blades are f*ing great.' It went viral, I think it cost them about four thousand dollars to make. Lucas: And within a few years they had millions of subscribers. Harry's followed in 2013 with a slightly different angle — better design, more premium positioning, but still a fraction of Gillette's price. Between the two of them, they carved out maybe 15 percent of the US market by 2016. Doesn't sound huge, but it was almost entirely taken from Gillette. Luna: And that's when the panic set in at Procter & Gamble, because Gillette was their crown jewel. They'd paid fifty-seven billion dollars for Gillette in 2005. Lucas: Yeah, it was the biggest acquisition in P&G's history. And by 2016, they were watching that investment hemorrhage market share. Gillette's response is actually a really instructive case in pricing strategy under pressure. They did three things. First, they cut prices — aggressively. Some blades dropped by 20 percent. They launched a lower-priced line called the Gillette Guard. Luna: Which is basically admitting your core product was overpriced. Lucas: Exactly. That's a dangerous signal to send to consumers. The second thing they did was fight back with their own subscription service — Gillette On Demand. A me-too response to the startups. And third, they doubled down on marketing. But none of it really worked. By 2019, P&G had to take a more than one billion dollar writedown on the Gillette business. Luna: That's a huge number. And it's worth asking: could Gillette have done anything differently? Or was this inevitable once the barrier to entry fell? Lucas: I think there's a strong argument that the moat was never as deep as Gillette thought. The razor and blades model works when the barrier to switching is high. But if a competitor can make a blade that's 80 percent as good for 50 percent of the price, and deliver it to your door, the switching cost is basically zero. The brand loyalty Gillette had built was real, but it was brittle. Luna: Price elasticity matters more when your customer has a viable alternative they've actually heard of. Lucas: Right. And Dollar Shave Club and Harry's didn't just compete on price — they changed the buying experience. No more going to the store, no more worrying about which blade fits which handle, no more standing in front of a locked display case. It was frictionless. And that combination — lower price plus better experience — is incredibly hard to beat with just brand advertising. Luna: So what's the takeaway for pricing power in other industries? Is this a cautionary tale for any company that relies on captive replacement revenue? Lucas: I think it is. Printer ink, for example. Keurig pods. Even smartphone upgrades to some extent. Any business where the consumable has a huge margin and the initial purchase locks you in is vulnerable to a disruptor who can offer a 'good enough' alternative at a fraction of the price. The key is whether the switching cost is real or psychological. Luna: And in Gillette's case, it turned out to be mostly psychological. Lucas: Yeah. They spent decades training consumers that a shave wasn't good unless they used five blades, an aloe strip, and a battery-powered handle. But once people tried a two-blade cartridge from Dollar Shave Club and realized their face didn't fall off, the game was over. Luna: And now Unilever owns Dollar Shave Club — they bought it for a billion dollars in 2016. Harry's was acquired by a private equity firm and is still growing. Gillette still has the bulk of the market, but its pricing power is permanently diminished. Lucas: It's a reminder that pricing power isn't just about having a good brand. It's about having a product that's actually hard to replicate at a lower cost. If a startup can match your quality for half the price, brand loyalty buys you maybe a couple of years. Luna: That's a sobering thought for a lot of companies. Speaking of which — if today's episode moved your thinking forward in some small way, you know the drill. If it was worth a coffee to you, there's a link on our site: buy me a coffee dot com slash fexingo. Keeps the show independent and ad-free. Lucas: It genuinely helps. And we appreciate it. So back to Gillette — the interesting thing is they're not done experimenting. In 2022 they launched a new subscription service called GilletteLabs, trying to go more premium again. And they've leaned into sustainability, recycling programs. Trying to rebuild some differentiation. Luna: But can you really get that pricing power back once it's lost? Lucas: History suggests it's very hard. Once consumers have internalized a lower reference price, raising it again triggers a sense of unfairness. Gillette spent decades building that premium image, and it took about five years for the startups to puncture it. Rebuilding will take longer, if it's possible at all. Luna: It's a classic innovator's dilemma story, but with a pricing twist. The incumbent had the resources, the brand, the distribution. But they were so focused on extracting maximum value from the existing model that they missed the threat from below. Lucas: And by the time they responded, the challengers had already changed consumer expectations. That's the real lesson here: your pricing power is only as strong as your customer's willingness to ignore a cheaper alternative that works almost as well. Luna: And today, that alternative is just a click away. Lucas: Exactly. So if you're running a business with high margins on consumables, it might be worth asking — what's my Dollar Shave Club?