At first no one wanted to buy Jell-O. The year was 1902, the product was jiggly, and people had no idea how to serve it. Then, its producers went door-to-door with free cookbooks. And the rest of the story is history.
By contrast, from the start, King Gillette was able to sell his invention. With disposable razor blades an attractive alternative to keeping used blades sharp, he did not have to worry about “free” until his patent expired in 1921. However, more competition meant he had to get loyal razor users who would continue buying the blades. So, at a steep discount, he provided the US Army with Gillette razors and also sold them cheaply to banks for their “save and shave” campaigns.
You see where we are going. Called the “razor and blade” strategy, price your product as a loss leader and then make money on its complement(s).
And that takes us to the Kindle Fire. With its manufacturing cost higher than its selling price, Amazon is using the “razor and blade” strategy.
The Economic Lesson
For goods and services such as cookbooks and Jell-O, razors and blades, or the Kindle Fire and apps, when you increase the quantity demanded of one product through a low price, you can stimulate demand for its complement. The route to profits is just a bit indirect.
An Economic Question: Using 2 demand and supply graphs, how might you illustrate the impact of a low price for one product on its complement?
When the NFL lockout ended, dry cleaners, ticket-takers and souvenir sellers rejoiced. But not chickens.
According to the National Chicken Council, on Super Bowl Sunday 2011, we consumed 1.25 billion chicken wings. Joe Sanderson, CEO of the 4th largest poultry seller, said that 12% of his sales related to Sunday football. And, before the NFL lockout ended, the Buffalo Wild Wings restaurant chain offered 6 free wings to all who signed their Facebook “save our season” petition. (They will give free chicken wings to 45,000 people.)
Think of a ripple. The NFLPA estimates that 3739 jobs are created by each game. On game days, the ticket takers, parking lot attendants and souvenir sellers are busy. Beyond, the sports bars, hotels and gas stations get more business. Municipalities collect additional revenue. And, Roser’s Fine Dry Cleaning could again clean New Orleans Saints uniforms. This Bloomberg Business article also tells about Ticketmaster sales spiking the day the lockout ended, Bud Light’s connection, and TV ad sales.
The Economic Lesson
Peanut butter and jelly, Kindles and eBooks, razors and razor blades are all complementary goods because a change in the price or a change in demand for one affects the other. If the price of a Kindle drops, then demand for eBooks could rise.
Similarly, the elimination of Sunday football would have had a devastating impact on the demand for chicken wings.
An Economic Question: Knowing that certain goods and services are complementary, retailers use one item to increase the sales of a second good or service. Which examples might come to mind?