Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Gillette Priced the Razor and Lost the Blade
Transcript
- Lucas: So let's start with a price that makes no sense on its own. A Gillette Fusion razor handle costs about eight to ten dollars. The refill blades? About three to four dollars each. If you bought the handle and never bought a blade, Gillette would lose money on you. And they're completely fine with that, because the entire business is built on the assumption that you will keep buying blades for years. Luna: Right, the classic razor and blade model. Give away the handle, lock in the consumable. But I feel like we've seen this playbook get disrupted in a lot of industries. What makes Gillette's case so interesting? Lucas: Because they invented it. King C. Gillette started selling his safety razor in 1903, and the strategy was simple: sell the razor handle cheap, sometimes even at a loss, and then make your margin on the disposable blades. By the mid-twentieth century, Gillette had essentially created a consumer habit that felt inevitable. You don't think about the cost per shave, you just buy the blades that fit your handle. Lucas: And for decades it worked beautifully. Gillette's market share in men's razors peaked somewhere around seventy percent. The gross margin on blades was massive, north of eighty percent in some years. That's the kind of economics that made Gillette a cash machine for Procter and Gamble after they bought it in 2005. Luna: Eighty percent gross margin. That's software-level profitability. So what happened? I assume the subscription guys came in with cheaper blades and just undercut them. Lucas: That's exactly what happened, but it's worth unpacking why. Dollar Shave Club launched in 2011 with a one-dollar-a-month starter plan. Harry's followed in 2013 with its own direct to consumer model. They weren't just offering cheaper blades, they were attacking the core assumption of the razor and blade model, which is that you, the customer, are locked in. Lucas: They made the handle cheap but also made the blades cheap. And they made it easy to switch. No need to go to a store, no need to remember which refill fits. You just get a pack in the mail every month. The lock-in that Gillette had spent a century building suddenly became a liability, because customers realized they had options. Luna: So the disruption wasn't just about price, it was about taking away the friction. Gillette's model relied on inertia, and these startups basically said, 'We'll handle the inertia for you, but at a fraction of the cost.' Lucas: Exactly. And the numbers tell the story. Dollar Shave Club grew from zero to over three million subscribers in about five years. Unilever bought them in 2016 for a reported one billion dollars. Harry's was valued at over one billion in 2019. Meanwhile, Gillette's market share dropped from around seventy percent in 2010 to below fifty percent by 2016. That's a massive erosion in half a decade. Lucas: And the thing is, Gillette tried to fight back with price cuts. In 2018, they slashed prices on their blades by up to twenty percent. But the damage was already done. Once customers realize they're paying a premium for a habit, it's hard to convince them to go back. Luna: It reminds me of the EpiPen story we did. There, the play was the opposite, raise prices and dare customers to complain. Here, the incumbents had to lower prices and still lost share. Both show how pricing power can be fleeting if you ignore the competitive landscape. Lucas: Precisely. And there's a deeper psychological element to the razor and blade model that's worth talking about. The initial low price of the handle acts as a commitment device. Once you've bought the handle, you have a sunk cost. You're more likely to buy the blades because you've already invested in the system. It's the same logic behind printers and ink cartridges, or gaming consoles and games. Lucas: But the subscription models flipped that. They made the commitment monthly, not per handle. And they made the total cost transparent. Instead of a vague 'I spend a lot on blades', you see a clear line item on your credit card every month. That transparency is powerful. Luna: So what's Gillette doing now? I imagine they've launched their own subscription service, right? Lucas: They have. Gillette introduced its own subscription offering, and they've been pushing lower-priced products in stores. But they're fighting the legacy of their own pricing structure. It's hard to convince consumers that you're now the value option when you spent decades being the premium one. Lucas: And here's a twist: the subscription model itself has its own challenges. Dollar Shave Club and Harry's have had to raise prices over time to become profitable. The economics of customer acquisition in the subscription world are brutal. You spend a lot to get each subscriber, so you need to keep them for a long time to make your money back. Luna: So it's not like the disruptors have found a magic formula. They just found a weakness in the incumbent's model. But now they're facing the same pressure to keep prices low while growing. Lucas: Exactly. And interestingly, the razor market is now seeing consolidation. Gillette's parent, P&G, actually invested in Harry's competitor, Dollar Shave Club's rival. Wait, let me rephrase. P&G launched its own subscription service, and there's been some consolidation among the startups. The market is still figuring out what the right pricing model is. Lucas: But the bigger lesson is about pricing power and competition. The razor and blade model is not dead, but it's under siege. And it's a great example of how a pricing strategy that works for decades can become a vulnerability when the market shifts. Luna: And it shows how important it is to understand the psychology of your customer. Gillette assumed that once you bought the handle, you'd keep buying blades out of habit. The startups realized that habit could be broken with the right pitch. Lucas: Right. And I think there's also a lesson for consumers here. The next time you're buying a razor, or a printer, or a coffee machine, think about the total cost of ownership. Are you paying for the hardware, or are you paying for the consumables? The pricing structure reveals the company's strategy. Lucas: And sometimes it's worth doing the math. A Gillette Fusion blade costs about three dollars. If you shave every day and change blades once a week, that's over one hundred fifty dollars a year. A subscription service might cost you half that. But you have to be willing to switch. Luna: That's a concrete number I can bring up next time someone says they don't have time to think about pricing. It's like, you're literally paying for laziness. Lucas: And that's the essence of pricing power. Some companies charge a premium because they offer convenience or brand status. But the question is whether that premium is justified. In Gillette's case, the premium was built on inertia, not on a better shave. And inertia is a fragile foundation. Lucas: So here's where I want to zoom out a bit. The razor and blade model is one of the most copied pricing strategies in business. We see it in printers, in gaming consoles, in even some software models. But what we learned from Gillette is that it only works if you can maintain the lock-in. Luna: And the moment the lock-in breaks, the whole edifice crumbles. I'm thinking about how this applies to other industries. Like, are there other companies still relying on this model that might be vulnerable? Lucas: Plenty. Look at the printer market. HP and Canon have historically sold printers at thin margins and made their profits on ink. But third-party ink cartridges and refill services have been chipping away at that for years. And some subscription models are emerging there too, like HP's Instant Ink, which charges you based on pages printed, not cartridges. Lucas: So the model is evolving. Instead of locking you into a specific cartridge, they lock you into a service. It's a different kind of lock-in, but it's still a lock-in. Luna: Interesting. So the lesson from Gillette isn't that the razor and blade model is doomed, but that you need to adapt your lock-in strategy as the market changes. Lucas: Exactly. And I think that's the takeaway for any business listening. Your pricing model is not a permanent asset. It's a hypothesis about what your customers value and how they behave. And you need to test that hypothesis continuously. Lucas: Gillette went decades without seriously questioning their model. They had the dominant market share, the brand, the margins. But they forgot to ask whether the customer still needed them. The startups did ask that question, and they found a better answer. Luna: Before we wrap up, I want to bring up something that's been on my mind. We talk a lot about pricing strategy on this show, and I know that for many listeners, these conversations have actually helped them think differently about their own business or their own spending. And that's exactly why we keep doing this. Lucas: Absolutely. And if today's episode gave you something to think about, you can support the show in a way that's surprisingly easy. One coffee's worth, if it was worth that to you. The link is buy me a coffee dot com slash fexingo. That's it. No perks, no rewards, just the satisfaction of keeping these conversations flowing. Luna: Yeah, that's the spirit. And it makes a real difference. We appreciate every bit of support, but no pressure at all. Lucas: So, back to the razor wars. One thing I find fascinating is how Gillette is now trying to reclaim its position. They've been investing in marketing, launching new products, and even trying to reposition themselves as a brand that understands modern men. But it's an uphill battle. Luna: Do you think they can ever regain the dominance they had? Lucas: Probably not to the same level. The market has fragmented, and consumers now have plenty of choices. But Gillette still has the brand recognition and the distribution network. They could be a strong player, just not the monopolist they once were. Lucas: And that's a lesson in itself. Pricing power is not permanent. It's a function of competition, customer loyalty, and innovation. Gillette had it all, lost some of it, and now they're fighting to get it back. The question is whether they can reinvent their pricing model to match the new reality. Luna: It's a classic David and Goliath story, but with a twist. Goliath is still standing, just a bit battered. And David is now getting big enough that he has to worry about his own pricing power. Lucas: That's exactly right. And maybe that's the lasting takeaway. Always be aware of the assumptions behind your pricing. Because the same strategy that made you successful can become the reason you lose your edge.