The Razor/Razor Blade Model of Business

Recently, Seth Godin’s Akimbo episode talked about the Razor/Razorblade model and it inspired me to write about it.

Here’s the story.

The King of Razors didn’t invent the safety razor.

What Gillette did figure out is that selling one razor is a lousy business, but selling a lifetime of blades makes a lot of sense.

First year the Gillette razor was for sale, he sold 51 and 168 of the cheap replacement blades.

The following year he sold 90,000 razors and 123,000 replacement years, which meant people were beating up the faces pretty good.

Astonishingly, 11 years later and not because of promotion, he sold 450,000 razors (not a lot of growth) and an amazing 70 million blades.

Gillette got a lot of credit for something he didn’t invent, which is give away the razor and sell a lot of blades.

What is true, is that he noticed that selling something over and over again is far more profitable than selling something once.

This simple idea led to what our culture is today, especially in medical devices.

The ideas of ratcheting, of lock in, of sunk costs, of people wanting to be part of a system, and we need to understand it for two reasons:

1. If we’re not careful, we can be a victim of it.
2. If we want to make a change happen, the best way to make it happen is to use these effects to dance with the culture in a way that the culture wants us to succeed.

Does this Ring a Bell?

Alexander Graham Bell may or may not have invented the telephone, but he did invent the Bell System.

Here’s how it worked:

1. He didn’t wire every home in America (he couldn’t possibly afford to)
2. He made a think notebook that explained everything you needed to know to plug your phone into the Bell System.

Why would you want to plug into his system? A telephone in Cleveland isn’t any good if you can’t call someone in New York.

This allows local systems to use various technologies, but if they were all different, the phone system couldn’t create as much value as it could.

This was an early example of how technology in any form likes it better when it can connect with others.

The Value of a Network

Fast forward 100 years, Bob Metcalfe was working in Xerox park and was asked if he could connect all the computers in their office.

At the time, all the powerful computers were in this one office.

This is because the first modern personal computer was conceived at Xerox’s Research Park in Palo Alto.

Well he did that, but then left to start a company that would sell this idea to other companies (Apple, IBM, Microsoft computers were showing up and needed this to connect).

That’s when he pioneered Ethernet, which was a conceptually simple but expensive way to connect a lot of computers to one another.

The box that his company, 3Com, made was expensive by today’s standard, but for a few thousand dollars it connect computers and printers within an office.

However, back then, this amount of money was prohibitive, and he was at risk to lose everything.

One night, he came up with a new idea that worked (and was an incredibly effective sales tool).

Every time you added another 3com switch and added another computer to the network, it cost the same.

It was linear. But the value of hooking one more person to the network went up exponentially.

Think about a circle of people shaking hands.

Two people equal one handshake.

If it’s five people, it’s not four handshakes.

It’s more than a dozen.

Every time we add people to the circle, the number of people you need to shake hands with goes up fast.

Metcalfes Law (named by George Gilder) is simple; the power of a network goes up by the square of the number of people on the network.

What Bob Metcalfe did was show in a simple graph was how powerful it was to connect, just as Bell did a hundred years earlier with the notebook he licensed to telephone entrepreneurs.

Locking In Dominance

It’s worth considering why certain languages have died off.

There are a multitude of reasons why this happens but here’s one simple explanation; parents make the choices.

Those choices are based on how they’re going to teach their kids things that will be good for them.

So between a language that's rare and dying off and one that is spoken everywhere, it’s obvious that the dominant one is picked.

More connection creates more value.

That's why there are fewer languages on earth today than any other time before, because the value accrues as we connect with one another, and that’s the network effect — the value of connecting with others based on what other people are predominately using.

That's not the only way we make our choices. Another example is lock-in.

Lock-in occurs when the cost of switching to something (that might even be better) feels too high.

So if you buy an iPhone and a MacBook at age 20, it’s likely that by age 30 you’ll own a variety of Apple products that only work on Apple products.

So when another company comes along with a better phone, that’s cheaper, with better features etc, you’re likely to not even consider it.

You’re locked in.

The switching cost is too high. As a professional, the pain to switch is to high.

So one thing that manufacturers and marketers do is work to cause us to embrace a lightning connector.

They work to get us to embrace things in our garage, in our office, that in our heads would be too hard to get rid of.

It’s not just limited to stuff, but even learning.

If you’re really good at using a Mac and your boss says the office is switching to Windows, the question isn’t “is Windows any good”, but “how much is it going to cost me in pain, in suffering, in time, that I have to switch from this thing I know to this thing I dont know?”.

That’s when we see lock-in colliding with the network effect.

Because when you’re surrounded by people speaking a different language (a spoken language or even computer language) you’re under even more pressure to switch.

That's why we see technology standards and cultural standards flip and flop so fast.

It doesn’t even seem like its happening that fast. It’s almost as though like nothing is happening.

Then one day, we have to admit incompetence and learn a new thing if we want to move from point A to point B.

After a snowfall, you might notice that it takes one person to create a new path with fresh footsteps.

That first person’s footsteps creates a trail that other people begin to use. If you come back at the end of the day, you’ll see that the rest of the field is untouched but the path has now become well worn.

Economists call this “Path Dependency” because little steps cause us to repeat them, and that creates this whole category of network effects and lock-in.

There’s a paradox here.

The paradox is that the work required to get lock-in, to get path dependency, to get network effects slows you down at first.

It’s much easier to be interoperable, to plug into the system as it currently exists. That's to say “you can pick anyone, and we’re anyone”.

If you have an android phone, you have dozens of text messaging apps, and if you switch from one to another, all your texts will go with you.

There are no switching costs because it's built on the idea of openness.

This doesn’t happen on the iPhone.

You can’t get a text off there and get it onto another phone.

Their system is locked and if you leave, you can’t take the data with you.

This distinction informs much of the work we all do as we bring a new idea into the world.

It’s much easier to show up with an idea that that easily slots into something people already doing.

But the cost of that, changing the culture, making an impact, building an organization, is you’re not building any of the other artifacts that keep organizations moving forward.

There are other things that are even more subtle.

If you’ve been donating and voting a certain way most of your life, it isn’t a technology problem or learning problem.

The problem is with cognitive dissonance, which says

“I do this, therefore, it must be right.

Im not an idiot.

Im not wrong.

So Im not going to reconsider my past choices and Im just going to continue doing what Ive always done”.

This is why little head starts do so much.

It helps build cultural pressure. It gives more practice.

More practice gets you a little more better.

Being a little more better gets you more trial. More trial gets you more network effect.

More network effect gets you a little more cultural imperative to do what people like us are doing, things like this.

And so the cycle continues.

So how is it possible to launch something new, something that’s vibrant, something that’s better, in a market where someone else is already the best?

Consider the case of Word Perfect.

Word Perfect had won. The game was over. Everyone used it because if you sent a Word Perfect document it had to be opened in Word Perfect.

Therefore, that path was well grooved and that small head start led to a bigger head start.

There was a great deal of lock in.

Mighty Microsoft had virtually no luck competing with them until something shifted.

What shifted had to do with word processors. It had to do with operating systems.

When Daas started to fade and people with PCs had to switch to Windows because of the Network Effect, because they had to keep up otherwise their productivity would go down and they would fall behind.

However, they had a challenge.

The challenge was that they had to switch their word processor, and Word Perfect withheld from the Windows world.

They weren’t interested in helping Microsoft with a new operating system.

The result, in that moment, all the sunk costs, all the lock in, became much less important. It was a new choice in a new moment.

And we see this quite often. We see it in politics, in charities, in companies. When something shifts, outside the area where you are, many of the dependencies shift as well.

So there’s this opportunity during times of shift.

Take Blockbuster who completely dominated VHS tapes. If you wanted to rent a movie, it made sense to rent from Blockbuster.

When you rented there you got a Blockbuster rental card and you could rent in other places. Blockbuster used this head start to get more movies.

More movies meant a better price and better selection, which meant there was no reason to go anywhere else but Blockbuster.

But then technology hit and the DVD came along. The DVD promised to reshuffle a lot of things, not just the device in our home.

Netflix understood that it’s much cheaper to ship a DVD and that you could buy them cheaper from the studios because DVD pricing had shifted to a purchase, not a rental.

Add all of this up, and they were in the right place, at the right time.

Something to note, they were one of the rare companies that managed to do this TWICE.

As the internet got faster, the team at Netflix realized that they too could be disrupted because all of the lock in they had built with DVD rentals could be replaced if someone came along and figured out how to stream videos.

Hence, their second big shift.

So when we think about making a shift in the world, a change, it’s either being done to us or by us. Here are four questions you can think about as you look at where you are.

1. What are the sunk costs that are getting in the way of you making a new decision?

What’s in your head that makes you say “I can’t do this because its going to be too expensive, painful, inconvenient etc”

2. Did you choose open systems or closed systems?

When you start the path, when you’re committing to be with a new razor or phone or anything, do you default to committing to systems that are open (where you can swap one thing for another without being dependent) or are you willing to take a closed system because someone offered a discount (because someone paid a little more to get you in, knowing they would get that back from lock in)?.

3. What change is coming to your industry?

What’s the sea of change coming to your industry, that’s going to eliminate many of the path dependencies, sunk costs, and lock in, that will allow you to have a fresh start?

4. Are you willing to create a network effect?

Are you willing to invest in creating a network effect, in something that works better if other people have one? Thats how the fax machine grew. We convinced others that they needed a fax machine because we had one and it was good for us if other people had a fax machine.

When you decide to invest in language, connection, in an ecosystem, and in a network effect, it’s going to cost us, but what comes out the other end is a shift in culture.

One one hand, I dont like to be manipulated. Like when I want to leave Apple but I can’t leave with my data.

Like when you have to buy new stuff just to fit a device.

Or when a company piles on behavioral economics to trick me into using sunk costs when making new decisions.

I dont like when theres lock in and you get stuck with things like fax machines for years longer because of network effects.

On the other hand, and its a really big “other hand,” the things we love, that give us power, and leverage, and productivity.

All of them benefit from the network effect.

All of them have a ratchet. All of them work because people like us do things like this.

All of them become part of the culture, and culture is the ultimate network effect.

It's on us to speak up, about how its supposed to be used and it's on us to use it wisely.