====== King C. Gillette ======
===== The 30-Second Summary =====
  *   **The Bottom Line:** **King C. Gillette was the entrepreneur who perfected the "razor-and-blades" business model, a masterclass in creating a deep [[economic_moat]] by locking customers into a platform and then selling them high-margin, recurring consumables.**
  *   **Key Takeaways:**
  * **What it is:** A strategy where a company sells a durable base product (the "razor") at a low price—or even a loss—to create an installed base of users who must then repeatedly purchase proprietary, high-profit consumables (the "blades").
  * **Why it matters:** This model generates incredibly stable and predictable [[recurring_revenue]], giving a business fortress-like durability and immense [[pricing_power]], two qualities that are music to a value investor's ears.
  * **How to use it:** As an investor, you can actively hunt for companies with this structure (think coffee machines and pods, printers and ink) to find potentially wonderful, long-term compounders for your portfolio.
===== What is King C. Gillette? A Plain English Definition =====
King Camp Gillette was not just the man on the vintage razor packages; he was a revolutionary business strategist disguised as a traveling salesman. While his most famous invention was the disposable safety razor blade, his true, lasting genius was the business model he built around it. To understand its power, let's step away from shaving for a moment and go to the movies.
Imagine you own a movie theater. You could charge $50 for a ticket and give away the popcorn for free. You'd make a lot of money upfront from each customer, but you'd have to convince them to pay that high price every single time. It's a tough sell.
Now, imagine the opposite. You give the movie tickets away for free, or charge a ridiculously low price like $1. The theater fills up instantly. But here's the catch: it's your theater, your rules, and you're the only one selling popcorn, candy, and soda, which you sell for a hefty profit. The customer, now happily settled in their seat, will gladly pay $8 for popcorn because the initial barrier to entry was so low. They'll do this every time they visit. You've turned a one-time, high-hurdle sale into a long-term, low-friction stream of high-profit revenue.
That is the essence of King C. Gillette's model.
Before Gillette, men bought a single, expensive straight razor that they would own for life, periodically sharpening it on a leather strop. It was a one-time purchase. Gillette's epiphany was to sell the razor handle—the durable part—for a very low price, sometimes even giving it away. He wasn't in the business of selling handles; he was in the business of creating a captive audience for his disposable blades. The handle was the movie ticket; the patented, high-margin blades were the popcorn.
Once a man owned a Gillette handle, he was locked into the Gillette ecosystem. Every few days, for the rest of his shaving life, he had to return to Gillette to buy more "popcorn." This transformed a single sale into hundreds of future sales, creating a river of predictable, recurring cash flow that built one of the most dominant consumer product empires of the 20th century.
> //"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage." - Warren Buffett//
===== Why It Matters to a Value Investor =====
For a value investor, a company is not a flickering stock ticker; it's a piece of a real business. We are obsessed with understanding the underlying mechanics that allow a business to thrive for decades. The "razor-and-blades" model, as pioneered by Gillette, is one of the most beautiful and powerful business mechanisms you can find. Here's why it's so important through a [[value_investing|value investing lens]]:
  *   **Creates a Formidable Economic Moat:** The single most important concept for a long-term investor is the [[economic_moat]]—a durable competitive advantage that protects a business from competitors, much like a moat protects a castle. The Gillette model builds one of the strongest moats: **high [[switching_costs]]**. Once a customer has bought the "razor" (be it a razor handle, a Keurig coffee maker, or an Xbox console), the cost, inconvenience, and hassle of switching to a competitor's entire system are significant. This lock-in keeps customers returning and keeps competitors at bay.
  *   **Generates Predictable, Recurring Revenue:** Value investors abhor uncertainty. We want to invest in businesses whose future earnings we can forecast with a reasonable degree of confidence. Companies that sell a product once (like a house builder or a furniture maker) have "lumpy" and unpredictable sales. Companies with Gillette's model have a base of millions of customers who are virtually guaranteed to make repeat purchases. This transforms revenue from a series of unpredictable lightning strikes into a steady, flowing river of cash, making it far easier to estimate the company's [[intrinsic_value]].
  *   **Bestows Incredible Pricing Power:** Because customers are locked into the ecosystem, the company gains significant control over the price of the "blades." While they can't be outrageous, they can consistently raise prices on the consumables over time to offset inflation and boost profits, without losing their entire customer base. This [[pricing_power]] is a hallmark of a truly great business and a powerful engine for long-term growth.
  *   **Focuses on Customer Lifetime Value:** The model forces a company to think about the long-term relationship with a customer, not just a single transaction. The real prize isn't the initial $10 for the razor handle; it's the hundreds or thousands of dollars a loyal customer will spend on blades over the next 20 years. Businesses built this way are inherently aligned with the long-term perspective of a value investor.
===== How to Apply It in Practice =====
You aren't just looking for King C. Gillette's historical company; you are looking for his //strategy// reincarnated in modern businesses. This is a mental model you can use to screen for potentially high-quality investments.
=== The Method ===
When analyzing a company, ask yourself these five questions to see if it possesses the "razor-and-blades" DNA:
  - **1. Identify the "Razor" and the "Blade":** Can you clearly separate the product line into two distinct parts?
    *   **The Razor:** A durable product that acts as a gateway to the ecosystem. It's often sold at a low margin or is a one-time purchase. //(Examples: Video game console, smart-home hub, water filtration pitcher).//
    *   **The Blade:** A proprietary, high-margin consumable that the customer //must// buy repeatedly to get value from the razor. //(Examples: Video games/online subscriptions, smart-home service fees, replacement filters).//
  - **2. Assess the Strength of the Lock-In:** How difficult is it for a customer to leave?
    *   **High Lock-In:** The blades are protected by patents, are technologically complex, or are deeply integrated into the user's workflow. Switching would be a major hassle. //(Example: Apple's iOS ecosystem).//
    *   **Low Lock-In:** Cheaper, third-party alternatives for the "blades" are readily available and work just as well. //(Example: Generic pods for a coffee machine whose patents have expired).//
  - **3. Analyze the "Blade's" Profitability:** Look at the company's financial statements. Does the segment containing the consumables have significantly higher gross margins than the segment containing the durable hardware? A great "razor-and-blades" company makes the vast majority of its profit from the consumables.
  - **4. Evaluate the Durability of the System:** Is this ecosystem still relevant, or is it facing disruption? The original Gillette model was brilliant for nearly a century, but it was eventually challenged by subscription services like Dollar Shave Club, which changed the game. Always ask: what could break this lock?
  - **5. Check the Management's Capital Allocation:** Does the company's management understand its own business model? Do they talk about their "installed base" of users? Do they focus on growing the sales of high-margin consumables? Wise management will reinvest profits from the "blades" to innovate and distribute more "razors," perpetuating the cycle.
===== A Practical Example =====
Let's compare two hypothetical companies to see the Gillette model in action.
  *   **Company A: "AquaPure Systems"** sells a stylish water filtration pitcher (the "razor") for a low price of $20. However, the proprietary, patent-protected filters (the "blades") cost $10 each and need to be replaced every month.
  *   **Company B: "Durable Pots Inc."** sells extremely high-quality, professional-grade kitchen pots (a one-time purchase) for $200 each. They are built to last a lifetime.
Which is the better business from a value investor's perspective? Let's analyze them using a table.
^ Feature ^ AquaPure Systems (Razor-and-Blades) ^ Durable Pots Inc. (One-Time Sale) ^
| **Business Model** | Sells cheap pitchers to create a captive market for high-margin, recurring filter sales. | Sells expensive, high-quality pots as a single, one-off transaction. |
| **Revenue Predictability** | **Very High.** Can reliably forecast revenue based on the installed base of pitchers. | **Very Low.** Sales are "lumpy" and depend on convincing new customers each quarter. |
| **[[Economic_Moat]]** | **Strong.** High [[switching_costs]]. Once you own the pitcher, you're locked into their filters. | **Weak.** Brand loyalty exists, but a competitor can always make a similar pot. |
| **[[Pricing_Power]]** | **Significant.** Can gradually increase the price of filters over time. | **Limited.** Must stay price-competitive with other high-end pot makers. |
| **Customer Lifetime Value** | **Extremely High.** A single customer could spend $120/year for many years on filters. | **Fixed.** The value is capped at the $200 sale price. |
| **Investor's Outlook** | This is a potential compounding machine. Predictable cash flows allow for easier valuation. | A good business, but its future is much harder to predict. More vulnerable to economic cycles. |
As you can see, while Durable Pots Inc. might be a fine company, AquaPure Systems has a superior //business model//. Its structure is designed for long-term, predictable profitability, making it a far more attractive candidate for a value investor seeking a durable, understandable business to own for years.
===== Advantages and Limitations =====
No model is perfect. As an investor, it's crucial to understand both the strengths and the potential failure points of this strategy.
==== Strengths ====
  * **Predictable Cash Flow:** As mentioned, this is the holy grail. It provides stability and makes it easier to calculate a company's [[intrinsic_value]].
  * **High Return on Invested Capital (ROIC):** After the initial investment in designing and marketing the "razor," the incremental cost of producing the high-margin "blades" is often low, leading to fantastic returns on capital over time.
  * **Scalability:** Once the system is established, it's relatively easy to scale. Each new "razor" sold adds another stream of recurring revenue with minimal additional corporate overhead.
  * **Customer Data and Upselling:** An installed base of users provides a wealth of data and a direct channel to upsell customers on new "razors" or premium "blades."
==== Weaknesses & Common Pitfalls ====
  * **Disruption Risk:** This is the biggest threat. A new technology or business model can render the entire ecosystem obsolete. (e.g., streaming services disrupting the DVD player/DVD model).
  * **The "Generic Blade" Threat:** If patents expire or if a competitor successfully reverse-engineers the consumable, a flood of cheap, third-party "blades" can destroy the company's high margins. This happened to Keurig with K-Cups and to printer companies with generic ink cartridges.
  * **Initial Adoption Failure:** The entire model hinges on getting the "razor" into enough customers' hands. If the initial product is too expensive, too complex, or fails to capture the public's imagination, the "blade" business never gets off the ground.
  * **Reputational Risk:** Customers can eventually feel exploited if the company becomes too aggressive with the pricing of its consumables. This can lead to backlash and an active search for alternatives, weakening the lock-in.
===== Related Concepts =====
  * [[economic_moat]]
  * [[recurring_revenue]]
  * [[switching_costs]]
  * [[pricing_power]]
  * [[business_model_analysis]]
  * [[warren_buffett]]
  * [[customer_lifetime_value]]