When we think of disruptive innovation, what comes to mind are high-tech startups such as Napster, Netflix (NFLX), Twitter, and Facebook. Few would think of a company selling mundane products such as razors and blades as disruptive. Yet this is what the recently launched Dollar Shave Club is trying to achieve.
With its hilarious viral video that amassed over 3 million views in less than a week, Dollar Shave Club is out to make customers an offer they can’t refuse—shaves for as low as a $1 a month. Not $1 a cartridge but $1 a month (which gets you five two-bladed cartridges monthly). You can also upgrade: For $6 per month, you can get a four-bladed razor, and for $9 per month you can get a six-bladed one. Sounds like a great deal, right?
Not necessarily. To illustrate why, try to imagine how much you spend every month on cartridges. Is it more or less than $6 per month? Most people think they spend over $6 per month. Well, they’re wrong. Gillette (PG) suggests that an eight-pack of its five-bladed Fusion cartridges, sold by Amazon.com (AMZN) for $28.99, lasts six months (an estimate that is likely geared to high-usage customers). This amounts to less than $5 per month. Once you figure out the monthly cost of shaving with Gillette, the Dollar Shave Club offer becomes much less appealing: You pay more for what are likely to be lesser-quality cartridges.
So why do Gillette’s razors seem more expensive than they really are? The reason is Gillette’s pricing model, which is based on per-cartridge pricing. The problem with this type of pricing is that people make errors when converting per-item prices to usage costs. They tend to focus on the per-item price, while adjusting insufficiently for usage duration. As a result, consumers erroneously conclude that a $6 per-month offer is a better deal than an eight-pack priced at $28.99, which lasts about 6 months. (For a more detailed analysis of Gillette’s pricing strategy, see the author’s comment below.)
A start-up such as Dollar Shave Club might not end up making a significant dent in Gillette’s sales. It can, however, teach Gillette a few valuable lessons. It might be time for Gillette to consider a subscription-based model for selling shaving gear—similar to Amazon’s “subscribe and save” program. Gillette might also consider communicating the price of its cartridges, not only in terms of unit prices but also in terms of monthly usage costs. In fact, Gillette might already have a “dollar shave club;” its Fusion customers spend on average about a dollar a week. The problem is that many of them believe they are spending much more.
Dollar Shave’s usage-based pricing might prove to be a disruptive innovation of the more-than-a-century-old, per-cartridge pricing model. This disruptive innovation is not technology driven; it stems from behavioral economics that foster a better understanding of consumers’ decisions.