Razor blades sure seem expensive, at least that’s what I think every time I have to buy a new pack of blades. So what do razor blades have to do with the strategy to grow business?
I also wasn’t that surprised this past weekend when I was looking at the blade options at my local drugstore, and I found, sitting side-by-side, two Gillette options:
- A promotion on a pack of 14 blades, which included a new razor handle in the package
- A pack of 11 blades with no handle in the package, which was the same price per blade as the 14-pack option
Needless to say, I chose the 14-pack option that included an essentially free new razor handle.
It doesn’t take a Ph.D. to realize that Gillette doesn’t make their money on the razor handle.
Gillette makes their money on the razor refills. And if the average male keeps a blade for 3 weeks, for example, then Gillette knows that he is going to purchase 17 blades per year.
Too many entrepreneurs are focused on maximizing the revenue of the razor handle, and they neglect to find the blade part of their business. My razor comment is figurative, of course, recognizing that none of the people reading this blog are actually in the razor business.
My point is that most business owners don’t look past the single sale of the razor handle to strategize on how they can develop their business beyond the initial sale.
If you can develop your business into a model whereby you can find an element of recurring revenue, it’s possible that you too can afford to either give away the razor at cost – or a substantially reduced margin – knowing that you will make your money through repeat buying.
Let me expand my comment. If you can develop your business so that you can find multiple sources (not just one source) of recurring revenue with every razor handle, then you can grow your business exponentially.
The cell phone companies definitely follow this model. The recurring revenue model is clearly the strategy to grow business, at least for many of them.
If a company can offer to sell you a cell phone either at cost or maybe even a couple of hundred dollars below cost, and then they sign you up for a 24- or 36-month contract, they know the lifetime value of the contract is well above the dollars lost on the sale of the cell phone itself.
Here’s an example. Let’s say the cell phone company loses $200 on the sale of the phone, but they make $30 gross margin per month on your cell phone plan. A 24-month plan will provide $720 of gross margin. The carrier will lose $200 on the initial sale, so their total profit over the 24-month plan is $520.
The carrier also knows that a certain percentage of customers will also just continue with the initial plan and not bother to upgrade their phone after the 2-year expiry. Now, imagine if the carrier can add more streams of revenue to the initial sale. For example, they could offer you a family plan or a double or triple play where they add in your home phone and internet. Then the initial $200 loss of the cell phone doesn’t seem like that much, does it?
There are a few ways to increase your business’s revenues.
- You can increase the number of customers
- You can increase the average sale price of your product – raise the price so you get more money every time you sell a product
- You can increase the frequency of purchases – find (more) ways to sell recurring revenue items to your customers
Building your business into a source of recurring revenue, or multiple streams of recurring revenue, will make it much easier to run your business and build profitability.
The ideal scenario is to build a recurring revenue stream so that the gross margin on the recurring revenue covers all of the other variable costs of your business. While the above does seem ideal, I’m often surprised by the number of entrepreneurs who effectively neglect to find the additional sources of revenue – and in turn, increase profits from their business.
Ask yourself this question: When your company sells a service, what other input does your customer need in order to install (or take advantage of) your service?
Most businesses sell one service. (Feel free to swap out service with product in the above sentence.) In many cases, something needs to be done, pre-install or post-sale, in order to make it work. What are those things?
It’s possible for you to either get into that additional market or to find a joint venture or partner with someone else who can complement your business. Throughout the entire process, look for things that you can add that will provide recurring revenue to your business.
The holy grail of any business is that you either have your entire company’s revenue as recurring or as I discussed above, the gross margin on the recurring revenue covers all of your other variable costs, so every widget sale is pure margin. Then add as many streams of recurring revenue to create stickiness, and dazzle your customers with outstanding customer service to minimize attrition.
The idea is to create a competitive cash-generating machine and effectively create a moat around you and your competitors. Then grow by finding new sources of revenue, and remember: constantly innovate. And that’s the strategy to grow business.
By the way, is your business’s revenue or profits stagnant? I can work with you on a consulting basis to help you get your business and wealth to the next level. Schedule a free 30-minute phone consultation with me here.
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