Why are razor blades so expensive
It is quite a popular question as to why the shaving razors are so expensive these days and to answer that question, we will try to analyze the case of Gillette, a brand which holds more than seventy percent of the market shares in the shaving razor business within United States. Before the company became private after being bought over by Procter & Gamble in 2005, it had submitted its last annual report for 2004, which contained relevant data like MD&A, financial statements, notes, etc. As the shaving razor business economics has not gone through any significant changes since that time, we can hold that report as the means to finding the information we need for understanding why razor blades are so expensive. In fact, this question can be further sub-divided into two other questions that are at times thought to be the reason behind the heightened price of shaving razors.
Is this phenomenon truly a result of manufacturing and marketing costs?
Although this would certainly seem to be the most feasible reason behind the high pricing of the product, after examining the annual report of Gillette in 2004, it has been concluded that it is not so. With a profit margin of 60% (2002 – 2004), it is quite clear that Gillette’s manufacturing costs were not exactly the reason behind the pricing they had put on their products.
Now, the marketing expenses must also be considered, especially since Gillette does need to spend a significant amount of that profit in marketing due to branding factors because it is important to build a brand association from the customer’s side in order to continue holding the position that the company enjoys at the moment. Unfortunately, this does not quite answer our primary question either. The reason is that even after spending on administrative, selling, advertising and all other general expenditures, the entire company had enjoyed a huge operating margin of 20-25%, while the razor & blades division in particular enjoyed a 38% profit margin and that is quite remarkable indeed.
Gillette also turned out to be amazingly efficient when the return on invested capital (ROIC) was taken a look at. It seems that not only was the return very impressive (25-30%), its return on shareholder’s equity (ROE) was astounding as well. On an average, 10-12% ROE is what is considered to be evenhanded and in that respect, a 60% ROE is certainly beyond the normal ranges of expectation.
Is there a cartel formed by the shaving razor companies in progress?
Before asking such a question, one must first consider the situation; a cartel formed by companies is not a likely possibility when one company holds more than 70% of the market shares. It would be much more appropriate to call this a monopoly run by Gillette, rather than a cartel comprising of all the major players in the razor blade business. This is a monopoly which was not achieved by the expected method of selling products at unbelievably low prices, but by advertising effectively to capture the mind of the customer.
The reason as to why razor blades are overpriced is also related to the fact that the customers do not seem to mind it much. It has been seen that customers are not really concerned with the pricing of the products such as toilet paper, soaps, shampoo, chips, soda, candy and other ‘trivial’ expenditures, even if they are overpriced (which they most often are!). On the other hand, while making purchases that require a large amount of money at once, like a car, an expensive cellphone or a flat-screen TV, people are way more skeptic. It is more about consumer psychology than rationality; it is for this reason that a trivial product sold by an established company is a recipe for profit and the answer to the question “Why Are Razor Blades So Expensive?” is no different either.