Two-Part Pricing: A Modern Scam from the 19th Century

King C. Gillette was a utopian socialist with kooky ideas, but inadvertently his development of the safety razor stimulated a business practice growing in popularity today. He didn’t invent the idea, but his actions gave rise to what could be considered a scam.

Gillette conceived an alternative to the unwieldy razor in use in the late 1800s. It included a smaller weight razor which held a blade that could be discarded once it was no longer sharp enough to be effective. It took a lot of experimentation to be able to produce the sharp edge on the thin blade. Eventually, machinists working with Gillette were able to mass-produce the blades that made Gillette’s razor idea work.

Contrary to his socialist political views, the price of the razor was unaffordable for many. When competitors entered the market, Gillette was forced to reduce his razor prices. Unexpectedly this became the beginning of a new business practice.

The more affordable razor price increased its demand. The real impact was in the subsequent increase in blades sold. The blades became the income generator, not the razor.

The concept that Gillette stumbled on is called two-part pricing. Basically, it involves a capital purchase item that is affordably priced but requires subsequent purchases of consumable items to make the capital purchase useful. Think of a coffee maker that requires purchases of cups of raw coffee to go with the coffee maker.

A number of businesses were launched using this model. Standard oil provided kerosene lamps to citizens of China to stimulate kerosene sales. Eastman Kodak followed a similar model with low-priced cameras. Today the two-part pricing model is prevalent in such business segments as printing, coffee, video games, and phones.

Is two-part pricing a scam? Maybe not to the level of other scams, but still, consumers are often unaware of the purchases they are being locked into when they buy a low-cost capital item.

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“It’s morally wrong to allow a sucker to keep his money.” – W.C. Fields (comedian)

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