FINANCE
57
PHIL YOUNG
Clever new companies are cutting up a classic business model
Razors, and all that jazz Phil Young PhD is an MBA professor and corporate education consultant and instructor
Have you heard the story of the razor and begun offering free videos, as well as paid the blade? It’s a classic model economists lessons on YouTube. Live lessons on Skype use to describe the business model where are also available. a company provides one element of its Just recently, one of the better-known product at an average or below-average performers with a very popular online gross profit margin while making a much course announced that he had been higher margin on the items that go with “secretly” working with several top guitar its usage. Typically, a company makes and makers to build a high-quality, but more sells both the razor and the blade. I’m sure affordable, handmade arch-top. What readers can think of other examples. caught my attention was the offer he made Two that immediately spring to to a prospective buyer of this guitar. First, mind are printer and ink cartridges; and the price seemed to be quite reasonable for coffee machines and pods. Of course, such an instrument: $4,999. But, second, such companies always have the risk of buyers of this guitar would automatically competitors offering a compatible version become members of his guitar club. This of the higher-margin consumable at a would entitle his customers to various lower price. I just discovered a coffee pod digital products – podcasts, videos and that works on my Nespresso machine at factsheets – free of charge. They are said a lower price than the genuine Nespresso to be worth $1,500 if purchased from him units. Internet shopping is truly a separately. In this example, what is the wonderful thing! razor and what is the The digital world blade? It is not clear. enables companies Perhaps the ‘mass The digital world to offer interesting enables firms to offer customization’ of his variations to the production team reduces interesting variations to traditional razor and the unit cost to less than the razor and blade model the one that individual, blade model. For example, a company small-volume luthiers can earn a high gross can achieve. But one profit margin on both their ‘razors’ and thing is for sure: digital technology is what their ‘blades’. Apple is perhaps the epitome makes this particular bundled offering of this. Its devices (the razors) command feasible. First, thanks to the internet margin well above the industry average, and YouTube, this jazz musician is able while its i0S platform and Apple Store are to provide lessons to a large number of ready-made distribution channels for its students. Second, he is able to promote his apps (the blades). Apple extracts fees from guitar and membership into his club to a app developers. And such fees have a very very targeted audience by using the email high margin. addresses of past and present students and Another variation, of which I recently those inquiring about lessons. And third, learned, has taken the razor and blade he is able to offer digital products with a model as a starting point, but disrupted high retail-value for free, because there it to dramatic effect. I am an amateur jazz is no significant cost associated with the guitarist. For most jazz guitarists, the making or distribution of these products. instrument of choice is a handmade, archApparently, his business model and top guitar. This can be quite expensive marketing effort are working well. While to own – a performance-standard model drafting this column, I received an email ranges in price from about $7,000 to from him saying that the demand for his upwards of two or three times that amount. guitar was overwhelming. So much so that Still, learning the art has become more he was forced to suspend the taking of any accessible. In recent years, an increasing more orders. It seems his new take on the number of jazz guitar professionals have razor and the blade is cutting through. Q1 2019 Dialogue