December 17, 2013

The Holy Grail of E-Cig Business: The Razor and Blades Model

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Electronic cigarette companies are taking quite a lot of different approaches to growing their business.  Some are focusing almost entirely on brand in hope of a quit acquisition from a larger company with the cash to launch them into the big leagues while others begin with a focus on consumer loyalty and appreciation.  Ultimately though, most of these companies are looking to build their business with freebie marketing — often colloquially referred to as the razor and blades business model.

Although Gillette Safety Razor Company is often accredited as the original freebie marketing company, the model had existed before.  The idea was to provide people with deeply discounted or even free razors in order to establish a customer base that would routinely buy the higher profit margin blade for the rest of their life.  Razors often sell at cost or at a loss so that companies can sell the only blades that fit the devices to consumers at a decent market up.

You’ve seen this in plenty of more recent examples.  Video game companies sell consoles at a loss to get people buying the games.  Cell phone companies practically give away cell phone in order to reap the benefits of data and connection plans.  Even a lease on a new car is little more than here’s a free car as long as you pay this exorbitantly more expensive long-term service plan.

Electronic cigarette companies hope to do the same thing.  By practically giving away starter kits with batteries, rechargers, a few cartridges, and maybe a carrying case, the company sets up customers to buy future refill kits (often 5-10 cartridges at a significant markup from cost) every time they run out.  This can be wildly profitable assuming other companies don’t hijack your starter kit customers with compatible cartridges (which is not uncommon).

Of course there are still companies out there selling starter kits for $50 to $100 for what should probably be closer to $20.  Those individuals may reap some quick returns now, but they aren’t likely to last.  The industry seems likely to got the way of the razor and blades model regardless of the type of products being offered.  Of course there will always be a place for the high-end ultra luxury mods (open system devices), but these will be the exception rather than the rule.

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