SPEAKER_00: Amazing, fascinating stories of inventions, ideas and innovations. Yes, this is the podcast about the things that have helped to shape our lives. Podcasts from the BBC World Service are supported by advertising.
SPEAKER_04: 50 things that made the modern economy with Tim Harford.
SPEAKER_02: There are clouds upon the horizon of thought, and the very air we breathe is pregnant with life that foretells the birth of a wonderful change.
SPEAKER_03: So begins a book written in 1894 by a man who had a vision that has ended up shaping how the modern economy works. The book argues that
SPEAKER_02: Our present system of competition breeds extravagance, poverty and crime. It advocates a new system of equality, virtue and happiness in which just one corporation,
SPEAKER_03: the United Company, will make all of life's necessities as cost-effectively as possible. It's the end of money, too. Instead, the manual labour required to make life's necessities will be shared out with perfect justice. It should take only about five years of each person's life. The rest will be freed up for intellectual pursuits. Ambitious people will compete not for material wealth, but to win recognition for promoting welfare and happiness of their fellow beings. All of this will take place in a city called Metropolis, located between Lake Erie and Lake Ontario, where Canada meets New York State. Metropolis will run on hydropower. It'll be the only city in North America. Its citizens will live in mammoth apartment houses, upon a scale of magnificence such
SPEAKER_02: as no civilization has ever known. These buildings will be circular, 600 feet
SPEAKER_03: across and separated by twice that distance of avenues, walks and gardens. Artificial
SPEAKER_02: parks will feature pillars of porcelain tile, with domes of coloured glass in beautiful designs. They will be an endless gallery of loveliness.
SPEAKER_03: I said that the author of this florid utopia had a vision that ended up shaping the economy. As you may have guessed, it wasn't this particular vision. No, it was another idea, one that he had a year later. His name was King Camp Gillette, and he invented the disposable razor blade. You may be wondering why that was so significant. Here's one illustration. If you've ever bought replacement cartridges for an inkjet printer, you'll likely have been annoyed to discover that they cost almost as much as you paid for the printer itself. That seems to make no sense. The printer's a reasonably large and complicated piece of technology. How can it possibly be so cheap when the ink is so expensive? The answer, of course, is that it isn't. But for a manufacturer selling the printer cheaply and the ink expensively is a business model that makes sense. After all, what's your alternative? Buy a whole new printer from a rival manufacturer? As long as that's even slightly more expensive than the new ink for your current printer, you will reluctantly pay up. That business model is known as two-part pricing. It's also known as the razor and blades model, because that's where it first drew attention. Sucker people in with an attractively priced razor, then repeatedly fleece them for extortionately priced replacement blades. King Camp Gillette invented the blades that made it possible. Before this, razors were bigger, chunkier affairs, and a significant enough expense that when the blade got dull, you'd sharpen or strop it, not chuck it away and buy another. Gillette realised that if he devised a clever holder for the blade to keep it rigid, he could make it much thinner, and hence much cheaper to produce. He didn't immediately hit upon the two-part pricing model, though. Initially he made both parts expensive. Gillette's razor cost $5, about a third of the average worker's weekly wage. His philosophical concerns about extravagance and poverty seem not to have clouded his business decisions. So eye-wateringly exorbitant was the Gillette razor, for 1913 Sears catalogue offered it with an apology that they weren't legally allowed to discount the price, along with an annoyed sounding disclaimer.
SPEAKER_01: Gillette safety razors are quoted for the accommodation of some of our customers who want this particular razor. We don't claim that this razor will give better satisfaction than the lower-priced safety razors quoted on this page.
SPEAKER_03: The model of cheap razors and expensive blades evolved only later, as Gillette's patents expired and competitors got in on the act. Nowadays, two-part pricing is everywhere. Consider the PlayStation 4. Every time Sony sells one, it loses money. The retail price is less than it costs to manufacture and distribute. But that's OK, because Sony coins it in whenever a PlayStation 4 owner buys a game. Or how about Nespresso? Nestle makes its money not from the machine, but the coffee pods. Obviously for this model to work, you need some way to prevent customers putting cheap, generic blades in your razor. One solution is legal. Patent protect your blades. But patents don't last forever. Patents on coffee pods have started expiring, so brands like Nespresso now face competitors selling cheap, compatible alternatives. Some are looking for another kind of solution – technological. Just as other people's games don't work on the PlayStation, some coffee companies have put chip readers in their machines to stop you sneakily trying to brew a generic cup of joe. Two-part pricing models work by imposing what economists call switching costs. Want to brew another brand's coffee? Then you have to buy another machine. They're especially prevalent with digital goods. If you have a huge library of games for your PlayStation or books for your Kindle, it's a big thing to switch to another platform. Switching costs don't have to be financial. They can come in the form of time or hassle. Today I'm already familiar with Photoshop. I might prefer to pay for an expensive upgrade than buy a cheaper alternative, which I then have to learn how to use. That's why software vendors offer free trials. It's also why banks and utilities offer special teaser rates to draw people in. When they quietly raise the price, many won't bother to change. Switching costs can be psychological too, a result of brand loyalty. If the Gillette company's marketing department persuades me that generic blades give an inferior shave, then I'll happily keep paying extra for Gillette-branded blades. That may explain the otherwise curious fact that after Gillette's patents expired and his competitors could make compatible blades, Gillette's profits increased. Perhaps by then, customers had got used to thinking of Gillette as a high-end brand. The irony is that the razors and blades model, charging customers a premium for basics like ink and coffee, is about as far as you can get from King Camp Gillette's vision of a single, united company, producing life's necessities as cheaply as possible. In his books Peroration, Gillette reached new heights of purple prose.
SPEAKER_02: Come one, come all, and join the ranks of an overwhelming united people's party. Let us tear asunder the chrysalis which binds within its folds the intellect of man, and let the polar star of every thought find its light in nature's truths.
SPEAKER_03: Evidently it's harder to inspire a new model for society than a new model for business.
SPEAKER_04: For further reading, we suggest Randall C. Picker's working paper, The Razors and Bladesmiths. For a full list of our sources, please see bbcworldservice.com slash 50things.
SPEAKER_03: Just before you go, I'd like to recommend another podcast series from the BBC World Service. CrowdScience. Think of anything sciency, anything you want to know. Ask the CrowdScience team and they will find out the answers. It's fascinating.
