Thursday, July 13, 2006

Observations: The Razor And The Blade

by Jim Lyons

The Hard Copy Observer, July 2006




This month, Jim Lyons, a 20-year veteran of the printing and imaging industry, shares his thoughts on the razor-and-blades business model that has defined the printing and imaging industry for decades. Is this model still viable, and what are vendors doing to adapt for survival?


A May 2006 headline in a financial blog that I follow really struck a nerve. Entitled “Lexmark’s and HP’s Printer Business Model Is Increasingly Unsustainable (LXK, HPQ),” the blog, which was published on SeekingAlpha.com, noted that Staples is promoting the Samsung CLP-510 color laser printer for just $199 (after a $50 mail-in rebate, of course). In a well-thought-out but still somewhat pessimistic analysis, the blogger claimed that the laser printer market is following the same path as the ink jet printer market—the street price of a new laser printer (including its toner cartridges) is now low enough to disrupt consumers’ virtually automatic, steady, years-long purchase of supplies to replenish their printer “investment.” Instead, the blogger insisted, consumers will frequently start over and purchase new hardware rather than a set of new cartridges.

Let me try to add some historical perspective to this “the sky is falling” scenario. For many years now, printer makers have used a marketing practice known as the “razor-and-blades” approach to pricing products and attaining profitability. The idea is to “lock in” a customer with a relatively costly initial investment in a product (safety razor or printer) and then sell a stream of supplies (blades or printer cartridges) to that customer over time. Because the “lock in” is key to the follow-on annuity, the supplier is motivated to make the customer the proverbial offer one cannot refuse for the initial purchase, and then be less generous in pricing the supplies from which the vendor realizes an annuity stream. A unique technological “match” between the original product and the follow-on is obviously important, but there is also an important relationship between the pricing of the more costly hardware and the less costly, but more frequently purchased, supplies. With that price ratio rapidly diminishing over time, there is the potential that the razor-and-blades models will be disrupted and that a growing number of consumers will choose to purchase a new printer or MFP rather than purchase supplies for their old model.

For more background on the model itself, I suggest consulting a marketing textbook or Wikipedia.com, where I found some other interesting real-life examples other than razors and printers. (To name a few: cell phones and wireless communication services, video game consoles and game cartridges, and set-top boxes and cable/satellite TV services.)

Lyra’s John Mc Intyre, whom I consider to be the ultimate industry expert on this topic, points out that while the dramatic price declines (and concurrent volume explosion) in the low-end color laser printer market are raising this debate now, the ink jet printer market faced the same issue a few years ago with the first sub-$100 and then sub-$50 printers. One of the industry’s ongoing adaptations with ink jet printer pricing has been to resist the downward price pressure, partly by adding more value to their hardware, with the ink jet MFP and photo-specialty categories being obvious examples. Look no further than HP’s June product rollout (featured on page 1 of this issue). Although the rollout included a Deskjet printer for $39, the least-expensive product touted in the firm’s press release is a more feature-rich $129 Officejet MFP.

(Larry Jamieson, director of Lyra’s Hard Copy Industry Advisory Service, recently published a case study of the razor-and-blades business model called Consumer/SOHO/SMB Markets: Big Volumes, Low Profits. For more information on this $299 report, call 617-454-2612 or visit Lyra on the Web at www.lyra.com.)

There is, however, a market element that the “doom-and-gloom” set who point to the imminent demise of the printer industry’s business model of choice ignore: there are different types of printer buyers. Personally, I am the type of consumer that printer vendors are worried about—I thrive on technology; am well-informed about printers, supplies, and their costs; and tend to seek out the best deals. Thus, I am more likely to follow the “start over again” path and purchase a new printer rather than just the new supplies for my old printer. But, as John Mc Intyre points out, many (or even most) consumers may be sensitive to the intangible “switching costs” associated with purchasing a new printer, such a setting up a new device and getting it to work smoothly with your PC when your old printer is working just fine. These consumers might decide to “leave well enough alone.” Many end users may simply not mind paying $100 or less for a set of new cartridges every once in a while (these are most likely the same people who ignore their mail-in rebates).

And then there is the question of the razor-and-blades model’s applicability (and thus its risk of disruption) for business customers. I would maintain that the predominant business model in large enterprises looks quite different from the razor-and-blades model from a marketing standpoint but exactly the same from a cash flow/profitability perspective. In many cases, enterprises’ IT groups invest heavily in product evaluation and then establish a very select list of “approved” hardware, based on stringent criteria and review. IT groups then standardize and purchase only those selected models and continue buying supplies for that installed base as long as the machines are in service. (For a vendor such as HP, this phenomenon has a familiar cultural ring to it, as getting commercial customers to standardize on any IT solution, whether hardware or software, creates a huge barrier of entry for your competition for years to come.) I maintain that business customers, excluding very small businesses, don’t fall into a high-risk category of changing their purchasing behavior. (Of course, business customers buy more industrial-strength products for which the hardware/supplies price ratio may be less of a factor.)

In addressing this topic, I realize I’m opening a huge can of worms, and that’s without even tackling the huge complication of aftermarket supplies. Collectively, the OEMs, the channel, and third-party supplies vendors study and fret over the hardware/supplies pricing/profitability issue more than any other, as perusal of this or any other recent issue of The Hard Copy Observer or The Hard Copy Supplies Journal will show. And Wall Street and the rest of the financial community have been focused on the whole relationship between hardware and supplies since long before the consumables portion of a printer vendor’s income statement became the dominant line item. In fact, this whole discussion is so central to the entire printing and imaging industry, I risk not being able to reach any big conclusions in this small space, but I’ll leave you with a couple of small ones.

First, don’t assume that all your customers will behave the same way that a relatively few geeky, technology-obsessive customers will. I will jump at the chance to replace an older piece of technology such as a printer or MFP with a new one, especially if I can rationalize it as a cost-neutral decision. Mainstream end users and businesses are probably much safer bets in terms of continuing their steady buying patterns, and one might argue they know how to spend their time more productively as well.

Second, adapt! Nothing ever stays the same, and those that don’t realize this truth are doomed. Twenty years ago, when HP was getting ready to roll out a new product, I heard some internal moaning over the fact that we were endangering what had become a lucrative “blade” business. The new product was the LaserJet Plus, which featured “soft font” capability and offered customers an alternative to buying the “blades”—in this case, $300 font cartridges. Offering a choice and better bang-for-the-buck was the right thing to do for the customer, and the record shows that HP found ways to continue to grow a profitable business nonetheless.

1 comment:

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