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How Product Lifecycle Management makes a difference in your industry: 
AEROSPACE
AUTOMOTIVE
CONSUMER
CONSUMER ELECTRONICS
DEFENSE
EDUCATION
INDUSTRIAL EQUIPMENT
HIGH-TECH ELECTRONICS
LIFE SCIENCES
PLASTICS
SHIPBUILDING
TELECOM
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Value Opportunity Four: Design for Ongoing Revenue Streams By Kevin P. Hopkins The experience of consumer products giant Gillette demonstrates the financial power of designing for ongoing revenue streams--first, locking in customers with a high-quality "platform product" and then generating a continuous stream of revenue by selling high-margin, low-cost supplies. There's an old saying in business school circles that the easiest way to build a long-term revenue stream is to "give away razors and then sell the customers razor blades." In some cases, that bit of wisdom turns out to be literally true. Consider the case of Gillette, the world leader in razor and shaving products. When King Camp Gillette began producing safety razors in 1901, no one could have predicted that these products would one day be found in nearly every American household. That first year, in fact, Gillette sold a mere 51 razors and 163 blades. But as men gradually realized the convenience of shaving at home--and as social customs grew to encourage daily shaving--sales of shaving products soared. And with it, so did Gillette's fortunes: the new company quickly captured more than 80% of the domestic shaving market, a leadership position that it holds to this day. A key reason for Gillette's enduring success has been the "sell them razor blades" business model that has been the foundation of the company's strategy since its inception. It's a revenue-generating approach that product development software maker PTC calls its fourth Value Opportunity, "Designing for Ongoing Revenue Streams." (As discussed in previous columns, PTC's Product First Roadmap defines paths and strategies that companies can take to create and capture value for their firms.) Indeed, by the time of Gillette's 90th anniversary, the company was earning $780 million from its razor products--just $40 million from the sale of 14 million razors, and fully $740 million from the sale of 2.4 billion blades. The Threat to Profits Yet, not too many years ago, it appeared as if Gillette's river of gold might dry up forever. As a famous Harvard Business School case study notes, by the mid-1980s, Gillette's "profits on blades and razors faltered and the price of Gillette's stock stagnated." A key factor was French pen maker BIC's introduction, in 1975, of a dramatic new shaving product: disposable razor blades. Geared to price-conscious consumers, the disposable razor blades cut the cost of shaving by as much as half as compared to traditional cartridge razors--and simultaneously slashed manufacturers' per-unit margins on blades by two-thirds. More troubling still, disposables effectively eliminated the low-cost ongoing revenue stream that the sale of razor blades made possible, threatening to turn the shaving products market into a lowest-common-denominator free-for-all in which Gillette's historical competitive edge could be dulled to nothing. True, Gillette managed to counter BIC's immediate challenge by introducing its own line of disposables that quickly vaulted Gillette to the forefront of this new market segment. But the threat remained. The company was headed for a significant decline in profits because of its seemingly desperate emphasis on the low-margin, single-purchase disposables, warned John Symons, who led Gillette's European Group and who would shortly take over all North Atlantic operations. Symons favored an aggressive and decidedly unconventional counter to the disposables challenge: introduce a new line of high-prestige cartridge razors that would be confidently marketed as "the antithesis of disposable razors." In other words, challenge consumers to value shaving comfort over price. Despite vigorous internal debate, Symons won the day, and shortly thereafter Gillette unveiled the innovative Gillette Sensor, an engineering marvel backed by a $100 million advertising campaign and a new slogan: "Gillette--The Best A Man Can Get." Declared Symons: "Sensor embodies the greatest number of technological advances ever combined in a single shaving system" and will set "a new, unparalleled standard in shaving performance." A Patent Wall A courageous marketing campaign was not the only critical aspect of Gillette's strategy. As Kevin G. Rivette and David Klein explain in The Harvard Business Review, "few companies (and certainly no consumer product company) can top Gillette's use of patents to secure and sustain a market choke hold, as the development of its Sensor shaver a decade ago demonstrates." According to John Bush, Gillette's former vice president of corporate R&D, the Sensor's independently mounted twin blades, which adjusted closer than any shaving device in history to the contours of a man's face, were the cornerstone of the company's patent strategy. Ultimately, Gillette engineers developed seven different designs for mounting the independent blades. The various designs delivered equivalent quality shaves for close to the same production cost. In the end, however, Bush told the Harvard Business Review; the company chose the design whose patent protections would give competitors "the most difficulty getting around." Indeed, the mounting mechanism was only the first of 22 separate patentable inventions that eventually were incorporated into the Sensor. "We created a patent wall with those 22 patents," Bush says. "And they were all interlocking so no one could duplicate the product." Locking in the Customer Many in Gillette's inner circle were worried about the multiple risks involved in the launch of the Sensor, but they needn't have been. As it turned out, consumers responded as enthusiastically to the new cartridge shaving system as John Symons had predicted, applauding the closeness, comfort, and appearance that the exquisitely engineered Sensor delivered. As a result, the Harvard Business School case study concludes, Sensor went on to become the best-selling cartridge razor in the North Atlantic market. The power of the approach is apparent in a simple set of statistics. Before the Sensor's introduction in 1989, Gillette held a 61% share of the U.S. razor blade market; by 1996, that percentage had climbed to 67%. In fact, the strategy of protecting ongoing revenue streams worked so well that Gillette pursued it again when it launched its high-end MACH3 shaving system in June 1998--at a price premium of 50% above its then top-of-the-line SensorExcel. Once more, the numbers tell the story. Within only six months of its introduction, the MACH3 had become the best-selling razor in the United States, with sales running at three times the level produced at a comparable point in Sensor's launch. And Gillette's share of the worldwide razor and blade market had soared as well, to more than 70%. The key lesson from Gillette's experience? Simply this: develop an innovative, high quality "platform product" that locks in the customer, and then generate revenue in perpetuity from that customer base through a high-margin, repeat-purchase product like razor blades. That's a basic tenet of PTC's Product First strategy--and one that Gillette, through courageous corporate decision-making and aggressive, confident marketing has used to solidify a century-old dominance in its marketspace. PTC's Product First Roadmap highlights this and eight other Value Opportunities, which we will continue to explore in upcoming columns. |
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Copyright 2003, by The McGraw-Hill Companies, Inc. |
