Wednesday, January 14, 2015
What's the Product?
Recently the Significant Other and I purchased a new printer. It's pretty cool -- it scans, emails, makes full-color photos, and does two-sided prints. Seemed like a great deal, too.
"Wasn't that a lot cheaper than the last printer?" I asked the SO.
"Sorta," he said. "But the cartridges are smaller."
He was right. We got a good price on the machine, but the printer company got an even better deal: An annuity in the form of regular sales of high-priced ink cartridges for as long as we use the printer.
In effect, the manufacturer is in the ink business, not the printer business. Ink is cheap, but ink cartridges manufactured specially for our printer are expensive. Over the course of a year, we will spend as much money on ink cartridges as we did on the printer. If we keep the printer for five years, the "printer" company will make a good, steady profit on our purchase.
Razors or Blades?
"I also can afford not to," he said. It was a great pitch, and it worked well, but maybe a bit too well in the view of major companies in the razor business.
The world's biggest razor company poured money into research to develop better razors. It added a second blade, then a third and, most recently, a fourth. It mounted the blades on a razor handle with a swivel head.
Men like these new, more malleable shaving implements, but they come at a price. The razor itself costs about ten bucks. Each new blade cartridge costs at least $3, and often $4 or more.
Like the printer company, the razor company is primarily in a different business: the blade business. It makes most of its money keeping the razors stocked with blades.
Perhaps that is why we see so many guys wearing full beards these days. It's more economical.
Cellphones or Service Contracts?
For years, mobile service providers have offered free or reduced-price cellphones to people who sign service contracts of varying lengths.
The phone is almost a loss leader, a bit like the printer or the razor handle, with the cost recovered over the period of the service contract. At least the mobile service providers admit that what they are selling is access to the internet, parsed out in monthly fees and, sometimes, extra charges for heavy usage.
In all cases, the companies assure themselves steady revenue streams not contingent on the vagaries of their markets in a given quarter or year.
(The state of California, for one, is not buying the "free phone" dodge, though. A couple years ago, the younger person negotiated a cell contract that included a nice phone at no cost. California had got there ahead of him and passed a law imposing sales tax on the imputed value of the phone -- a $50 charge in his case. So much for the free phone.)