In our opinion, the Keurig® Single Cup Coffee System, which is owned by Green Mountain Coffee Roasters, Inc. is an example of “razorblade” product development. This consumer item conforms to the dictate that any product in our “razorblade” product category incorporate both durable and non durable components. The Keurig® brewing systems is the durable component of the product, while the Keurig® “Pods” amount to the non durable component of the system, which must be periodically replenished by the user.
This hybrid combination of durable and non durable components has, evidently, generated an enormous amount of revenue. As Oliver Strand wrote in an article With Coffee, the Price of Individualism Can Be High on February 7, 2012 in the Dining & Wine Section of the New York Times web site, the actual price, per pound of coffee, paid by users of this brewing systems who opt for certain brands of coffee pods for Keurig, amounts to $51.00, or over 4 times what one of our staff members pays for fresh roasted Sumatra coffee from a local grocer. A 400 percent markup beyond top grocer pricing for comparable non durable items is nothing to sneer at, especially when one considers the reach of this product in terms of customers and the frequency at which replenishment is required.
It is no wonder, then, that “razorblade” product design is something of a holy grail for product marketers. An especially precious feature of any example of this type of product design is the need that customers almost universally experience to replenish the non durable component of the product. In fact, the need to replenish amounts to a core driver of a recurring revenue component to these products. Of course, any product that includes a solid recurring revenue component is highly prized. In fact, operational expenses (OPEX) will be dramatically lower for these products. Existing customers who are effectively “hooked” on replenishing non durable components do not require further sales efforts. Neither do these customers require much in the way of additional marketing (though the history of the Keurig® system does include a substantial amount of follow-on marketing cost, which accompanied Green Mountain Coffee Roaster, Inc’s ambitious expansion of the pod coffee options for the system, as well as its attempts to introduce additional durable components in the form of new brewing systems).
Given the lucrative revenue qualities of “razorblade” product design, enterprise IT ISVs (and their computing hardware partners) have searched for a method to incorporate the same type of product in their offers. We think that cloud computing and the App store feature of mobile computing devices are two examples of these efforts. We will talk a bit about cloud and Apps in the next couple of posts to this blog.
© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved