Imagine you owned a tiny tollbooth on a bridge that every single man had to cross every morning. Each day, they'd pay you a small, almost unnoticeable fee. The fee is so small they don't really mind, and the bridge is so convenient there's no other good way to cross. Your only job is to collect the coins. This is, in essence, the business of Gillette in its golden era. Gillette, the company, is a world-famous producer of safety razors and personal care products. But for an investor, particularly a value investor, Gillette represents a powerful idea: the concept of a “consumer monopoly.” It's a business that sells an inexpensive, essential product that is used up and repurchased with unthinking regularity. You shave, the stubble grows back, and you need to buy another blade. It's a cycle as predictable as the sunrise. This simple, repeatable transaction, multiplied by hundreds of millions of customers worldwide, created one of the most powerful profit machines in business history. It became a favorite investment of Warren Buffett, who famously admired its simplicity and unbreachable competitive fortress. He saw a company that didn't need a PhD to understand and whose future earnings were remarkably easy to forecast.
“It's a wonderful business. You shave, it grows back, you have to shave again. The most that can happen is that beards will come back in style, and we'll just have to wait for the next fashion cycle.” - Warren Buffett (paraphrased)
Studying Gillette is like studying a masterpiece to understand the principles of great art. It provides a timeless framework for identifying the qualities that separate a truly wonderful business from a merely good one.
A value investor's goal is to buy a wonderful business at a fair price. The “wonderful business” part is what Gillette teaches us. It wasn't a flashy tech company or a speculative venture; it was a brilliantly simple engine of wealth, built on four powerful pillars that align perfectly with the value investing philosophy. 1. The “Razor-and-Blades” Business Model: This is the company's masterstroke. Gillette often sold the razor handle (the “razor”) at a very low price, sometimes even giving it away, to lock customers into its ecosystem. The real profit was in the high-margin, consumable, and proprietary razor blades. Once you owned a Gillette Mach3 handle, you couldn't use a competitor's blade. This created a stream of recurring_revenue that was the envy of the business world. For a value investor, this predictability is gold, as it makes estimating a company's intrinsic_value far more reliable. 2. An Unbreachable Economic Moat: An economic_moat is a durable competitive advantage that protects a company from competitors, just like a moat protects a castle. Gillette's moat was deep and wide, consisting of several layers:
3. Incredible Pricing Power: pricing_power is a company's ability to raise prices without losing significant business to competitors. Because of its brand loyalty and superior product, Gillette could periodically increase the price of its blades by a small amount, and customers would barely notice or simply accept it as the cost of quality. This ability to consistently raise prices ahead of inflation is a direct driver of long-term profit growth. A business without pricing power is at the mercy of its costs; a business with it controls its own destiny. 4. Low Capital Requirements and High Returns: Once the factories were built, stamping out another billion razor blades was incredibly cheap. This meant the business didn't need to constantly reinvest huge sums of money just to maintain its position. It gushed cash, which could then be returned to shareholders through dividends and buybacks. This is a key trait that value investors like Buffett seek: a business that earns high returns on the capital it employs. These four pillars created a business that was stable, predictable, and highly profitable. This stability allowed investors to purchase it with a greater margin_of_safety, knowing that even if their future growth estimates were slightly off, the underlying strength of the business provided a substantial cushion against permanent loss.
You may not be able to invest in the Gillette of the 1980s, but you can use its success as a mental model—a “Gillette Test”—to analyze potential investments today. It’s not a mathematical formula, but a qualitative framework for identifying elite businesses.
When you look at a company, ask yourself these four questions to see how it stacks up against the Gillette archetype.
Look for a business model with a sticky, recurring revenue component. Is there an initial product (the “razor”) that locks a customer into buying a consumable or a service (the “blade”) repeatedly?
Go beyond the brand name. What truly protects this company from competition?
Test for pricing power. Read annual reports and listen to management calls. Do they talk about “price optimization” and “value capture,” or do they constantly complain about “competitive pressures” and “price wars”?
Is this a product that people will likely still be using in 10 or 20 years? Does it solve a basic, timeless human need?
Applying this test helps you shift your focus from short-term market noise to the long-term fundamentals of the business itself—the very heart of value investing.
Let's apply our test to two hypothetical companies: “Perpetual Software Inc.” and “Trendy Phone Co.”
| The “Gillette Test” | Perpetual Software Inc. (The “Gillette”) | Trendy Phone Co. (The “Anti-Gillette”) |
|---|---|---|
| 1. Razor & Blade Model? | Yes. Sells its core business software with an annual subscription and offers paid add-ons. The software is the “razor”; the recurring subscription is the “blade.” | No. Sells a physical phone. Revenue is lumpy and depends on a big new product launch each year. Customers can easily switch brands with their next purchase. |
| 2. Economic Moat? | Strong. High switching costs. Once a company integrates Perpetual's software into its operations, it's incredibly painful and expensive to switch to a competitor. | Weak. The industry is hyper-competitive. Brand loyalty is fickle and depends on having the “hottest” new feature. Competitors from China, Korea, and the US are constantly innovating. |
| 3. Pricing Power? | Significant. They can increase their annual subscription fee by 5-7% each year because the cost of switching is far greater than the price increase. Customers are locked in. | Very Little. They are in a constant price war. If they raise prices, customers might just buy a similar, cheaper phone from a rival. Their margins are always under pressure. |
| 4. Simple & Enduring? | High. Businesses will always need accounting, payroll, and customer management software. The core need is timeless, even if the software gets updated. | Low. The technology changes at lightning speed. Today's cutting-edge phone is tomorrow's relic. Predicting what the mobile phone market will look like in 10 years is nearly impossible. |
Conclusion: Based on the “Gillette Test,” Perpetual Software Inc. is a much more attractive business for a long-term value investor. It has a predictable revenue stream, a strong defense against competition, and the ability to control its own pricing. Trendy Phone Co., while it might have a hot product this year, is a much more speculative and risky investment over the long run.
The Gillette model is a powerful tool, but it's not infallible. It's essential to understand its strengths and, more importantly, its potential blind spots in the modern economy.