We have spent sometime over the last few posts to this blog discussing what we refer to as a “razorblade” product development strategy. The purpose of this strategy is to equip an enterprise ISV business with a method of building recurring revenue. The model we are describing owes much to the product strategy that Gillette Corporation and its competitors implemented to meet the personal needs of men with regards to shaving. Within this model the durable component is the razor designed by Gillette and its competitors, which replaced the blade of the razor with an apparatus which would accept cartridges. These cartridges added a non durable component to the shaving system. In fact, users need to replenish these cartridges. Over time, the amount of revenue received by manufacturers of these systems from sales of replacement cartridges far exceeded the revenue received from the sale of the durable component–meaning the razor, itself.
There are many examples of products that have been built along these lines. Most of these examples derive a considerable proportion of revenue from sales of the non durable component of the product. We spent sometime discussing one example of these present day examples, the Kerig® one cup coffee system. This system produces a considerable amount of revenue from the sale of so-called “coffee pods” which must be purchased, specifically, for the coffee maker, which is the durable component for the system. An added benefit for the manufacturer is that the amount of content (meaning the ingredients that make up a lot of the benefit for users of the complete coffee system) required for each pod is very small; therefore, the non durable component of the system is highly efficient, which contributes even more to the profitability of the operation.
On November 29, 2012, Willy Shih appeared on Bloomberg Surveillance. We found the airing of this interview with Professor Shih to be quite timely. In fact, as we will present in a later post to this blog, in our opinion, Prof Shih presented a compelling case for manufacturers of razorblade products — including enterprise IT ISVs — to allocate substantial ongoing resources to the task of defending market place position for the durable component of these products. We should note that prior to his present position at the Harvard Business School, Willy Shih spent a considerable amount of time at Kodak. In fact, he served as head of its consumer digital business in 1997. Therefore, he speaks with considerable authority on this topic.
In the next post to this blog we look at the modern mass market camera product as a preamble to our comment on Mr. Shih’s interview on Bloomberg Surveillance on the 29th of this month.
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