There is a business model called the Razor-Razorblade model. Basically, the razor handle is sold at cost or even a loss and the producer makes their money on selling razor blades on a recurring basis. The same model applies to printers and ink cartridges. The printers sell for a nominal charge, probably close to cost, and the manufacturer makes their money on the continual sale of ink cartridges for the life of the machine. Cloud based storage like Google Drive and Dropbox actually give a base level of storage for free and then charge annually for more storage as the user uses the free storage up and gets dependent on the platform.
Investopedia defines the model more precisely:
The razor-razorblade model is a pricing tactic in which a dependent good is sold at a loss (or at cost) and a paired consumable good generates the profits.
Also known as a razor and blades business model, the pricing and marketing strategy is designed to generate reliable, recurring income by locking a consumer onto a platform or proprietary tool for a long period. It is often employed with consumable goods, such as razors and their proprietary blades.
There has been some buzz lately about the model extending to a variety of products. There are reports that some auto manufacturers are contemplating monthly charges for things as mundane as floor mats to more sophisticated options like heated and cooled seats. Obviously, for floor mats such a move would benefit after market sales (think Weathertech). But, for vehicles connected to the internet, like most are, features like heated seats, entertainment options, and many other features can be turned on or off remotely. Thus, if a consumer wants these features they have to pay.
The auto companies could generate additional monthly revenue for each new car sold or leased. Furthermore, they would continue charging for these options in the used car market simply because the internet connectivity makes it possible to do so.
Needless to say, there are estimates the 75% of the auto consuming public thinks this is, to use the vernacular, bullshit. I am in that 75% and believe that 75% is low.
One of the articles I read in Business Insider hypothesized the following:
Imagine the start of a hypothetical summer Monday, some time in the future. You remotely start your coffee machine ($5 a month for the app to schedule brewing in advance and another $25 for recurring delivery of compatible pods) while you hit your stationary bike for a quick workout ($30 a month for access to classes). When you're ready to head into the office, the smart thermostat automatically turns down the air-conditioning (a $10-a-month feature) as you use an app on your phone to remotely start your car (which costs you $20 a month). And if you want to get any of that fixed? Put away your screwdriver, because you'll have to go to the manufacturer for even a minor tune-up.
Just because it can be hypothesized doesn’t mean it will necessarily happen. There is something called competition and Adam Smith’s Invisible Hand that come into play. If I had to pay a monthly access fee for my coffee maker beyond buying the pods. I would immediately cease using the Nespresso and use my Moka Pot more. Look what happened when Gillette was charging outrageous prices for blades. Upstart e-commerce models like Harry’s popped up with more reasonable pricing and changed the dynamics of the market. I am sure the same would happen in markets like coffee makers and other similar products.
When it comes to cars, I believe there would be a further stratification of the marketplace. In the high-end luxury market, I would imagine monthly fees would hardly matter to folks buying or leasing cars that cost north of $200K. Luxury buyers thrive on exclusivity and would gladly pay for that. On the low end of the market, I can imagine Camry’s coming with base level models with no monthly fees and maybe two more feature levels with increasing monthly fees for the options packages. Also, what would happen to these fees when the auto market goes into recession. I imagine they would be history or waived to make sales.
Personally, I hope these grandiose notions flop in a grandiose way.
Time will tell.
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