Freebie marketing, also known as the ‘razor and blades’ business model, is a business model wherein one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as supplies. For example, inkjet printers require ink cartridges, ‘Swiffers’ require cloths and cleaning fluid, mobile phones require service contracts, and game consoles require accessories and software. It is distinct from a loss leader (an inexpensive product sold at a loss to stimulate sales of more profitable ones) and free sample marketing, which do not depend on complementarity of products or services.
Although the concept and its proverbial example ‘Give ’em the razor; sell ’em the blades’ are widely credited to King Camp Gillette, the inventor of the disposable safety razor, he did not originate this model. The usual story about Gillette is that he realized that a disposable blade would not only be convenient, but also generate a continuous revenue stream. To foster that stream, he sold razors at an artificially low price to create the market for the blades. However, Gillette razors were expensive when they were first introduced, and the price only went down after his 1901 patent expired: it was his competitors who invented the razors-and-blades model.
The Gillette company still uses this approach, often sending disposable safety razors in the mail to young men near their 18th birthday, or packaging them as giveaways at public events the company sponsors. Cable company Comcast often gives away DVRs to its subscribing customers. However, the cost of giving away each free DVR is offset by a $19.95 installation fee as well as a $13.95 monthly subscription fee to use the machine. Based on an average assumed cost of $250 per DVR box to Comcast, after 18 months the loss would balance out and begin to generate a profit. Another historical example is that of Standard Oil and its owner, John D. Rockefeller, who gave away eight million kerosene lamps for free or at greatly reduced prices in China to create a market for kerosene there. Among American businessmen, this gave rise to the catchphrase ‘Oil for the lamps of China.’
The freebie marketing model loses its appeal if the price of the high margin consumable in question falls due to competition. The scheme works most effectively when the company has an effective monopoly on the corresponding goods, which can violate antitrust laws. In the 1990s, Microsoft was accused of releasing Internet Explorer at no charge to destroy Netscape’s market. Another threat to the freebie model is when consumers use the subsidized product for something other than the company’s intended purpose. This has happened to ‘free’ personal computers with expensive proprietary Internet services and contributed to the failure of the CueCat barcode scanner. The service they were intended to support never caught on, but the inexpensive scanners are still being sold on secondary marketplace sites like Amazon and eBay. The booklover social networking site ‘LibraryThing’ sells USB CueCats to aid with scanning ISBN barcodes for entering books into the site.
Computer printer manufacturers have gone through extensive efforts to make sure that their printers are incompatible with lower cost after-market ink cartridges and refilled cartridges. This is because the printers are often sold at or below cost to generate sales of proprietary cartridges which will generate profits for the company over the life of the equipment. In fact, in certain cases, the cost of replacing disposable ink or toner may even approach the cost of buying new equipment with included cartridges, although included cartridges are often ‘starter’ cartridges that are only partially filled. Methods of vendor lock-in include designing the cartridges in a way that makes it possible to patent certain parts or aspects, or invoking the Digital Millennium Copyright Act to prohibit reverse engineering by third-party ink manufacturers. Another method entails completely disabling the printer when a non-proprietary ink cartridge is placed into the machine, instead of merely issuing an ignorable message that a non-genuine (yet still fully functional) cartridge was installed.
Atari had a similar problem in the 1980s with Atari 2600 games. Atari was initially the only developer and publisher of games for the 2600; it sold the 2600 gaming console itself at cost and relied on the games for profit. When several programmers left to found Activision and began publishing cheaper games of comparable quality, Atari was left without a source of profit. Lawsuits to block Activision were unsuccessful. Atari added measures to ensure games were from licensed producers only for its later-produced 5200 and 7800 consoles.
In recent times, video game consoles have often been sold at a loss while software and accessory sales are highly profitable to the console manufacturer. For this reason, console manufacturers aggressively protect their profit margin against piracy by pursuing legal action against carriers of modchips and jailbreaks (respectively, hardware and software that modifies the device to accept non-authorized content). Particularly in the sixth generation era and beyond, Sony and Microsoft, with their PlayStation 2 and Xbox, had prohibitively high manufacturing costs so they were forced to sell their consoles at a loss, and these losses widened especially in 2002–2003 when both sides tried to grab market share with price cuts. Nintendo had a different strategy with its GameCube, which was considerably less expensive to produce than its rivals, so it retailed at break-even or higher prices. In the following generation of consoles, both Sony and Microsoft have continued to sell their consoles, the PlayStation 3 and Xbox 360 respectively, at a loss, with the practice continuing in the most recent generation with the Playstation 4 and Xbox One.
‘Tying’ (selling one product or service as a mandatory addition to the purchase of a different product) is a variation of freebie marketing that is often illegal when the products are not naturally related (for example, requiring a bookstore to stock up on an unpopular title before allowing them to purchase a bestseller). Tying is also known in some markets as ‘Third Line Forcing.’ Some kinds of tying, especially by contract, have historically been regarded as anti-competitive practices. The basic idea is that consumers are harmed by being forced to buy an undesired good (the tied good) to purchase a good they actually want (the tying good), and so would prefer that the goods be sold separately. The company doing this bundling may have a significantly large market share so that it may impose the tie on consumers, despite the forces of market competition. The tie may also harm other companies in the market for the tied good, or who sell only single components.
Another common example comes from how cable and satellite TV providers contract with content producers. The production company pays to produce 25 channels and forces the cable provider to pay for 10 low-audience channels to get a popular channel. Since cable providers lose customers without the popular channel, they are forced to purchase many other channels even if they have a very small viewing audience. The cable companies then in turn require customers purchase ‘packages’ of channels, rather than selecting them a la carte.
The Daily Omnivore 