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From Wikipedia -

"Freebie marketing, also known as the razor and blades business model, is the concept of either giving away a salable item for nothing or charging an extremely low price to generate a continual market for another, generally disposable, item. The concept was pioneered by King C. Gillette, inventor of the disposable safety razor and founder of Gillette Safety Razor Company (today known as Global Gillette, a division of Procter and Gamble). It is a similar concept to loss leader marketing."

I think I'm in this situation. My software is a $20-$50 month SAAS, but requires a $250 hardware and equipment investment to even get started. I am getting feedback that the initial investment is putting people off from making the jump. (I am targetting very small and independent businesses.)

What are your thoughts on my company subsidizing the initial investment in order to secure the future SAAS revenue?

Having paid something for the hardware and implemented my software, they would be relatively likely to stick around. I can easily fund the discount, especially if most people stay with me and pay it back over 2 or 3 months.

However, I'm not sure if this is a sign of weakness and that I'm maybe trying to build something that is unviable for my target market. After all - even the worst salesman can buy 'stuff' and sell it for an instant loss!

Do you have any opinions, comments, or other examples on how best to manage this?

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Thanks for early answers - one point is that I wouldn't cover whole cost of investment. Maybe 30%. I would be aiming to pay that back over 2.5 months of subscription revenue. – Benjamin Wootton May 15 '10 at 9:12
Interested in knowing how the hardware fits in with your Business Intelligence app (based on the info you listed). – JeffO May 15 '10 at 15:27

4 Answers

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At $250, you're finished recopuing costs at 5 months (at best) or 12.5 months (at worst). It seems like you're dealing with a high-value, high-cash B2B product. Would taking part in the loss-leader strategy, while simultaneously raising monthly costs, be reasonable? Would it work to do loss-leader then have the first 5 months have 50% higher costs? Would it make sense to, perhaps, require that they choose either a $250 installation or take part in a contract that requires them to stay committed for more than x months?

In such a situation, we aren't dealing with a loss-leader of a $1 razor that has a replaceable set of blades costing $10. We're dealing with a loss-leader of a $250 installation with a recurring cost of $20-50. You can see the inequality, and it holds risk.

The problem is, the initial implementation is so expensive that you can have a hit-and-run; that is, a customer that subscribes for one or two months and then bails, netting you a $150-210 loss, which is very risky.

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Thanks for your comment. I do agree the inequality point which makes this a different calculation. As above, I wouldn't fully subside the hardware cost. – Benjamin Wootton May 15 '10 at 9:17
up vote 2 down vote

As your own Gillette example illustrates, a loss leader with some customer lock in can be a fantastic idea. If your value proposition is compelling, and if you have a good degree of lock in, then I don't see why not.

Maybe you should consider pricing your service higher? At 250 USD initial 'subsidy' for each customer, and acquisition costs & operations expenses on top of that, you're looking at more than 5 / 13 months before break even on each customer. That's very high, and probably not workable for an inexpensive service as yours.

I assume you have spoken with customers, and they mention the startup fee as a problem? Be sure it's a real concern, and not just an assumption.

Edit: Follow up to the comment, if you're going to do this, then why not go all the way? If initial startup cost is a blocker, then I don't see reducing it from 250 USD to say 150 USD changing the customer's mind. You would need to radically reduce the initial extra charge; to 50 USD or 0 USD, and win it back on minimal contract lengths, higher monthly subscription, getting creative with fees etc.

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Thanks for your comment. It's a really interesting point - by removing initial risk and investment I suspect the customer would accept a higher recurring cost. Mobile phone companies do this - e.g. free IPhone on the £50 a month contract, or pay for the IPhone on £30. Again, I probably wouldn't subsidise whole setup costs. – Benjamin Wootton May 15 '10 at 9:20
up vote 0 down vote

You could charge more per month, or the customer can pay for a year in advance for a discount. This allows you to segment the market (i.e. those who wish to pay at once for less overall are happy; those who need cash-flow assistance are happy), and either way you've paid back the initial $250 cost more quickly (immediately in the annual case, fewer months in the other case).

Any chance you can escape the question and just not require that hardware? Prob not, but had to ask...

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up vote 0 down vote

Is there a possibility of requiring less hardware or cheaper hardware? Will those costs go down over time (ie they cost more because you don't have customer volume)?

What Dish Network does (or did) is give you a few free months if you purchased one of their receivers. So about a $300 up-front cost would save close to $100. Something to consider.

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