The Razor And Blades Model

Published Date: 02 Nov 2017

In situations where the business growth is fairly predictable and quite linear, a subscription model is the most ideal one to follow. There are usually three categories of the subscription-based revenue model, which could either be per user, per device, or a per enterprise model (Teece, 2010).

The per user subscription model is one of the best tested and tried models. The client or customer may be a single individual using a single account or an account that is used by different concurrent users. The charge is usually based and determined according to the number of concurrent users.

The per-device subscription can also be categorised into two subcategories. It may either be a pre-concurrent or total device usage policy, and which the charge depends on the total amount of data used, or a pre-processor model, which takes into account the total number of processors or cores that are made accessible to the host system. For example, if an 8 core processor is deployed in an SQL Server which is servicing 20 or 25,000 users on a single database, the user will be charged for the total number of cores that are being used.

The per-enterprise license allows companies to purchase a single license for their multiple employees to use. The company usually purchases a license based on the number of users that it wants to allow to use the service. The license is usually for storage accounts or for the use of the software. Licenses are also usually bought in multiples of 10, 50, or 100.

Spotify and Sony music unlimited are two Internet companies that have been using the subscription model quite profitably for the last three or four years.

The Razor and Blades Model

The razor and blades model is one of the classic business revenue models. Classically, this involves pricing the main equipment quite inexpensively while aggressively marking up the consumables. Incidentally, it takes its name from the razor companies that price the razor very cheaply while the razor blades are quite expensive to buy. The company is also sometimes discount the original equipment so aggressively that they incur losses, but as the original equipment is quite long-lived, the company ultimately makes huge profits on its consumables and maintenance (Teece, 2012).

Cloud-based companies also take this into account. Android phones are one example of this, where the company ships off the main phone at quite a cheap price while it aims at generating profits from the sale of low-priced apps. The apps are priced marginally and the company targets profitability through large-scale sales.

The Pyramid Scheme Business Model

Basically, the Pyramid scheme is a process of generating money by recruiting more new members, whereby each member pays an entry fee which is essentially the income of the person recruiting him. From an initial investment, a person earns multiple times by recruiting more and more people in ranks below him. It is considered Illegal as it defrauds more than 90% of the recruits because this scheme is mathematically proven to be non-sustainable in the long run and all the people in the lowest tier lose all their investment.

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Although such a business is usually non-sustainable in the long run, companies can use certain elements of this model in their business applications. Concepts such as network marketing and multilevel tiering if used properly are a novel concept and go a long way in increasing the profitability of companies. If used effectively in Cloud computing technology, firms stand at running a lot with very little initial investment (Epstein, 2010).

This concept was initially used by Gmail to attract users by limiting invitations to a select group of individuals and then allowing a limited number of invitations to each user to invite more people. In this way, users forwarded those invitations only to those friends and family members who they thought would be better able to use the service. Subsequently, the service attracted only such members who needed to use the service and they could provide targeted service to the user base. Although no money was initially involved, this technique proved to be a very thought out and effective measure to attract targeted user base. Another potential benefit was that as it was not open to general public, it created a hype which resulted in a lot of word-of-mouth advertisement for the service.

The Network Effects Business Model

Cutting Out the Middleman Business Model

This model, as the name implies, tries to remove the middleman between the vendor and the client. Essentially, this both increases the profits of the vendor while at the same time decreasing the cost to the client.

This business model tries to do away any non-essential expenditure for the deliverance of content from the seller to the buyer. Practically this means removing the hardware media for deliverance of digital content. Content is directly downloaded or streamed to the client's device from the cloud and there remains no need for CDs or other similar media.

Another potential benefit of this business model is that it removes all the limitations of data delivery. Sales are not limited to the amount of CDs available in the market and physical stores need not be set up all around the world. The costs of setting up such stores as well as providing the hardware for distribution can be easily cut down and the object can be provided to the customer at a lower cost. Companies can use economies of scale to maximise their profits as the number of sales is limited only to the number of customers.

The Low-Cost Carrier Business Model

Basically, the low-cost carrier model takes its name from the practice initiated by different airline companies to provide low-cost transportation. Examples of such airlines include RyanAir, South-West Airlines, Laker Airways, ValuJet, Midway Airlines, MetroJet and Continental Lite. Aircraft usually operate with a small set of optional equipment, instead focusing on the main objective of taking passengers from one point to another. Each additional service and convenience is charged separately and incrementally. Initial cost per seat is usually very low but the other additional costs sometimes make these flights more expensive. Except the very cost conscious passenger, the general public, subconsciously, usually spends more on the flights. Food, pillows and even blankets are charged separately. There is usually no entertainment system in the aircraft except monitors on which different advertisements are played together with the usual route, speed and altitude information (Gross & Schröder, 2007).

This is also a very successful business model in cloud computing whereby the basic service is provided at a much discounted price which is usually quite lower as compared to the market. But the service is usually restricted to the very basic and stripped of all additional ‘benefits’, that are quite normal in other similar companies products. These additional benefits are charged incrementally and separately. One benefit to customers is that they are able to choose each and every additional benefit that they need without wasting of such options that they do not require if they buy the product as a whole.

The company, on the other hand, benefits from providing only the necessary enhancements to the required users without wasting precious storage and processing on customers do not need them. The benefits that are provided are also charged at higher price than they are in lump sum packages.

The Online Content Business Model

The Freemium Business Model

A New York venture capitalist, Fred Wilson, posted his ‘favourite business model’ in his blog in 2006, where you "give away your service for free... then offer premium price to value added services or an enhanced version of your service to your customer base" (Wilson, 2006).

Initially, this model lacked a name and different readers came up with different suggestions. However, a suggestion by Jarid Lurkin to name its freemium based on the words free and premium, has stuck.

A freemium service is described as a free service that debt initially targets users and creates a large user base. Later on a premium service can be provided to premium paying customers; however these additional services are not different services but rather different levels of the same free service. Advertisement also plays a part in revenue generation through this method, but it is treated as a supplement rather than the main source of income.

The following main features have been identified for the freemium business model (Reime, 2011):

Value proposition of free offer: the value proposition is meant to attract a large user base. It should be sustainable over time, although a good model will have some limitations that will cause users to consider an upgrade.

Value proposition of premium offer: there must be a strong motivation for customers to consider a premium upgrade and convince them to pay for the service. If there is no strong motivation, the business will have a large number of non-paying customers that will cause the business to flop in the long run.

Conversion rate: the conversion rate refers to how many customers are switching from the free version to the premium one. Conversion rates are usually seen as a percentage of the user base.

User base: the size of the user base is an important measure of the growth efficacy of the business. Such growth is a metric of the strength of both the free value proposition and the efficiency of the acquisition channels.

Position in value system: it is important to consider the role of the company in delivering value as compared to the required input. The profitability of the model is highly dependent on the impact of cost as a relation of the service that is being produced.

User acquisition channels: although there are many Internet channels and online networks that can be used to reach the customer base, e-mail and social media are the leading channels. However, leveraging the already online presence of customers for acquiring new clients can go a long way in reducing the company's cost of marketing.

Lock-in effects: it is paramount that once users have been hooked onto the service, they should be measures in place to reclaim them and encourage their continued use. Features and mechanisms that increase the switching cost of users, for example customer loyalty, or customisation, will cost customers to think quite a lot before switching to another service and will consider upgrading to the premium service has been cheaper.

User community: if a company creates a user community through different techniques like online forums, it will reduce the cost of customer service from the company as online users will encourage and help each other to reach solutions. A company that has an online forum usually attracts more customers without any incidental costs to the company.

Other revenue streams: although the main revenue generation is from the premium service that the company offers, other streams are also available that augment and support operation. Advertisement and complimentary products are the most common alternate revenue channels that are used by companies to increase profitability.

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The Professional Open-Source Business Model