Why people utilize this model
It drives increased market share by being more psychologically appealing
Offering your full product at its full price right up front can be exceptionally expensive to a consumer, especially if there’s no guarantee that they’re coming back to buy more. Fortunately though, the average consumer doesn’t think too far into the future about those future costs, even when buying expensive items like a car. As such, with a razor-razor blade pricing structure you can utilize your “razor” as a loss leader or low margin product to get consumers over that initial price sensitivity hump, all knowing that they’ll be back for more “razors.”
A corollary to this in the SaaS world means making sure you offer a low priced tier that provides value, but ensures the consumer will want more of the product through proper throttling. Pricing along a value metric ensures that happens automatically, as well.
It generates customer loyalty and creates steady revenue streams
The Razor-Razorblade model forces customers to make repeated purchases of the “razorblade” which creates a continuous source of revenue for the companies.This implicitly engenders customer loyalty and creates high psychological switching costs. If you’ve been shaving with Gillette razors for 20 years, it would probably take something more than an extra blade (or 10) on a Schick razor for you to switch over.
In the SaaS world, subscription models offer the exact same advantages. Even if something is being automatically charged to a credit card or an invoice, building the relationship through interaction month after month allows a business to push the switching costs to the max.
It gives your customers freedom
A bit counterintuitive to getting a customer in the door and under some high psychological switching cost, but by allowing a customer the opportunity to keep coming back, you can up and down sell them accordingly. Extra add-ons, premium razors, or even different levels of additional products allow you to serve numerous customers, all with different, but increasing lifetime value.
As long as the “base” is uniform enough, you can give customers the flexibility to choose their own adventure, attracting a larger market...and larger amounts of revenue.