Razor and blades model

Freebie marketing, also known as the razor and blades business model, is the concept of either giving away a salable item for nothing or charging an extremely low price to generate a continual market for another, generally disposable, item. The concept was pioneered by King C. Gillette, inventor of the disposable safety razor and founder of Gillette Safety Razor Company (today known as Global Gillette, a division of Procter and Gamble). It is a similar concept to loss leader marketing.

Development

Main article: King Camp Gillette

While working as a traveling salesman in the 1890s for the Crown Cork and Seal Company, Gillette had an idea while attempting to shave one morning. His straight razor was so worn from use that it could no longer be sharpened. His idea was to create thin, cheap, removable blades that could simply be removed from the handle and discarded when no longer usable.

As consumers use up the blades they then purchase replacements, potentially going on for years and decades. This ensures a steady flow of consumers.

Applications

Freebie marketing has been used in business models for many years. The Gillette company still markets disposable razors in the fashion of their founder, often sending disposable safety razors in the mail to males near their 18th birthday, packaging them as giveaways at public events that Gillette has sponsored, et cetera.

Standard Oil

With a monopoly in the American domestic market, Standard Oil and its owner, John D. Rockefeller, looked to China to expand their business. Representatives of Standard Oil gave away eight million kerosene lamps for free or at greatly reduced prices.

This also resulted in a slogan among American businessmen, "Oil for the lamps of China." In other words, if you give them the lamp, they'll buy the kerosene from you. Oil for the Lamps of China became the title of a book written by Alice Tisdale Hobart explaining the phenomenon in a fictionalized way.

Comcast

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.

Music

In July, 2007, Prince gave away 2.8 million units of his most recent album for free by bundling them with The Mail on Sunday. The The Mail on Sunday paid a 36-cent licensing fee for each CD. As such, Prince earned approximately $1 million in licensing fees and in turn, sold out 21 August concerts in London which grossed $23.4 million (a record for the region). (The Mail on Sunday also increased its circulation by 20% for the day.)

Addictive Substances

With both legal and illegal substances free samples of addictive substances can create a market. In its most derogatory sense the marketer is called a pusher. Even when the substances in question are legal this has largely been outlawed. In the US and elsewhere there exist laws restricting freebie marketing in pharmaceutical, tobacco, and alcohol markets.

Issues

The freebie marketing model may be threatened if the price of the high margin consumables in question falls due to competition. For the freebie market to be successful the company must have an effective monopoly on the corresponding goods. (Market dumping to destroy a smaller competitor is not covered here) This can make the practice illegal.

Knockoffs

Computer printer manufacturers have gone through extensive efforts to make sure that their printers are incompatible with cheaper aftermarket ink cartridges and cartridge refilling. 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 (Note: included cartridges are typically partially filled 'starter' cartridges). 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.

In Lexmark Int'l v. Static Control Components the United States Court of Appeals for the Sixth Circuit ruled that circumvention of Lexmark's ink cartridge lock does not violate the DMCA. On the other hand, in August 2005, Lexmark won a case in the U.S. that allows them to sue certain large customers for violating their boxwrap license.

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 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.

Other goods

Consumers may also find other uses for the subsidized product rather than utilize it for the company's intended purpose, which adversely affects revenue streams. This has happened to “free” personal computers with expensive proprietary Internet services and contributed to the failure of the CueCat barcode scanner.

Affiliate Marketing makes extensive use of the freebie marketing business model, as many products are promoted as having a "free" trial, that entice consumers to sample the product and pay only for shipping and handling. Advertisers of heavily-promoted products such as Açaí Palm targeting dieters hope the consumer will continue paying for continuous shipments of the product at inflated prices - and this business model has been met with much success.

Websites specializing in Sampling and discounts have proven to be very popular with economy-minded consumers, who visit sites which utilize freebies as link bait. The business model of these sites is to attract visitors that will click on Adsense and complete affiliate offers.

Tying

Main article: Tying (commerce)

Tying 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.

Legal Issues

In some jurisdictions (the US state of Michigan, for example ), it is illegal for an establishment to give away alcohol or tobacco products.

Different freebie practices can be seen as anti-competitive. For example Microsoft was accused of releasing Internet Explorer at no charge to destroy Netscape's market. see United States v. Microsoft

See also

• Complementary good for a good that should be consumed with another good
• Loss leader for an item that is sold below cost in an effort to stimulate other profitable sales
• Consumption subsidies
• Product bundling for offering several products for sale as one combined product
• Product churning for selling more product than is beneficial to the consumer
• Vendor lock-in
• Demo (marketing), an event in which free samples of a product are distributed
• Trojan horse (business)