The Razor & Blade Cartel: Why Smart Money Follows the Consumables

• The razor and blade model creates recurring revenue by selling low-cost hardware to lock in high-margin consumable sales.
• These companies offer predictable cash flows and strong pricing power, making them attractive defensive investment opportunities.
• Tech and consumer giants like HP, Sony, and Keurig successfully use this strategy to dominate their respective markets.
• Key risks include generic competition and tech disruption, while the subscription economy offers new growth avenues.

The Subtle Art of Getting Customers to Pay Forever

The Most Elegant Trap in Business

Let’s be honest, we’ve all fallen for it. You buy a new printer for what seems like a pittance, a genuine bargain. You feel rather smug about it, until a few weeks later when you need to replace the ink. Suddenly, you’re staring at a bill for two tiny plastic cartridges that costs nearly as much as the printer itself. It’s at that moment you realise you haven’t just bought a product, you’ve signed an unwritten, long term contract.

This, my friends, is the razor and blade model. It’s one of the oldest and most devilishly clever tricks in the book. You sell the initial item, the ‘razor’, for a song to get your foot in the door. Then, you make your real money selling the essential, high margin consumables, the ‘blades’, for years to come. To me, it’s a fascinating strategy because it preys on our inability to calculate long term costs. And in a world of economic uncertainty, the predictable revenue it generates can be a thing of beauty for an investor.

The Modern Masters of the Model

You see this strategy everywhere once you start looking. Take HP Inc. for example. They’ve practically built an empire on the back of overpriced ink. They know that once their printer is sitting on your desk, you’re a captive audience. The hassle and cost of switching to a whole new system is just enough of a barrier to keep you coming back for their proprietary cartridges. It’s a masterclass in customer inertia.

Then you have the titans of entertainment, like Sony. The PlayStation console itself is often sold at a very slim profit, or sometimes even a loss. Why? Because Sony isn’t in the business of selling boxes. They are in the business of selling access to their world. Every console sold is another customer who will likely spend hundreds, if not thousands, of pounds over the next several years on games, subscriptions, and digital add-ons. The console isn’t the product, it’s the key to a walled garden where Sony sets the prices.

From Coffee Pods to Digital Subscriptions

This isn’t just a tech phenomenon. Look at Keurig Dr Pepper. They managed to put a machine in millions of kitchens that only accepts their specific coffee pods. They turned a simple daily habit into a recurring revenue stream. Once you’ve bought the machine and found a flavour you like, are you really going to go through the fuss of finding an alternative? Probably not.

What I find particularly interesting is how this model is evolving. The core principle of locking a customer in is now the bedrock of the subscription economy. Fitness companies sell you an expensive bike, but the real money is in the monthly class subscription. Software is often free to start, but the premium features that you actually need are, you guessed it, behind a paywall. It’s the same old trap, just with a new digital coat of paint. For an investor, identifying companies that execute this well could be a shrewd move, as their cash flow is often far more predictable than a business relying on one-off sales. Of course, no investment is without risk, and these companies face threats from cheaper, third party alternatives and the constant march of technology. But for those with a strong brand and a truly ‘sticky’ ecosystem, the model is incredibly resilient. It’s why a collection of these companies, like the Razor & Blade Cartel basket, presents such a compelling theme. It’s a bet on a business model that has proven its worth time and time again.

Deep Dive

Market & Opportunity

• The business model creates predictable, recurring revenue streams from high-margin consumables.
• Customer lock-in provides significant pricing power, allowing companies to maintain margins during inflationary periods.
• The broader shift toward a subscription-based economy is amplifying the effectiveness of this strategy.
• These businesses are considered defensive, as recurring revenue provides stability during economic downturns.

Key Companies

• HP Inc. (HPQ): Sells printers at low margins to create a captive market for high-margin, proprietary ink cartridges.
• Keurig Dr Pepper Inc (KDP): Sells single-serve Keurig brewing systems to generate recurring revenue from the sale of K-Cup coffee pods.
• Sony Corporation (SONY): Sells PlayStation consoles at or near cost, generating profits from game sales, downloadable content, and subscription services.

Primary Risk Factors

• Competition from third-party manufacturers offering compatible, lower-cost consumables like generic ink or coffee pods.
• Technological disruption that can make entire product ecosystems obsolete.
• Consumer backlash against pricing strategies and potential regulatory scrutiny over anti-competitive practices.
• Failure to continuously innovate can lead to disruption by more agile competitors.

Growth Catalysts

• The ongoing shift to subscription models creates new opportunities for companies to apply the razor and blade strategy.
• Combining physical hardware with digital services, data, and AI can create stronger customer lock-in.
• Predictable cash flows make these companies attractive to investors, particularly during periods of economic uncertainty.