Cost Transparency Is The New Black: Research Group

A number of businesses have made significant profits by leveraging a razor & blade business model, introduced and perfected by Gillette . The name derives from the marketing practice of selling the permanent platform (razors) at or below cost and the consumable complement to the platform (blades) at a significant mark up over cost. Other examples of industries that have used this business model include printers & printer ink, video game consoles and games, and today’s topic – vacuums and their many costly accessories.

For many years, the market leaders in these industries had the advantage of offering goods or services for a price that did not reflect the total cost to the consumer. They were able to do so because, after the initial purchase, switching costs were not insignificant. However, new competitors entered these markets with transparent business models and were able to gain market share, reduce prices and more importantly, lower costs to consumers.

An example is Kodak’s entry into the consumer inkjet market. Since the launch of its line of printers, Kodak has been able to educate consumers regarding cost-per-page and increase their market share, while offering significant ink cost savings to consumers. This has helped keep ink costs from rising at their historical rate.

Another industry that has thrived in the razor and blade business model, and that is likely to experience further disruption, is the manufacturing and sales of vacuums for the home.

A study conducted by TeleNomic Research and released today by the American Consumer Institutefound that the long-term expense of operating and maintaining a vacuum cleaner usually costs consumers much more than the vacuums’ purchase price.

This is because a vacuum may require maintenance and the purchase of accessories like vacuum bags, belts and filters; and these costs are seldom obvious at the time of purchase.

In fact, the cost of maintenance and required replacement accessories are usually not explicitly identified on the retail box, so getting this information before purchase requires a lot of research time – making comparisons across brands and models nearly impossible for most consumers. The fact is that manufacturers generally do not want their customers to know these costs, because manufacturers benefit from hiding these costs. After all, once consumers buy their vacuums, they are locked into buying their expensive accessories, for many years to come.

The TeleNomic Research study – “Are Manufacturers Cleaning Up?” – compares the most popular brands and models and calculates a long-term cost estimate, referred to as the Vacuum Cost of Ownership (VCO). The VCO is the sum of the price of the vacuum plus the cost of all of its accessories and maintenance over a 5-year period.

In finding that the cost of operating and maintaining vacuums is most often greater than the upfront price of the vacuum, the study uncovered a number of examples, including one in which the 5-year VCO for one vacuum was seven times the original price of the vacuum.

This study provides evidence that alternatives to the razor and blades business model could produce significant savings for consumers. For example, among lower-priced vacuums and those vacuums rated lower in performance and quality by a survey of repair shops, the Shark Navigator, while the most expensive model in its class, had no variable costs and provided the lowest cost-of-ownership over a five-year period (see Figure 1).

Similarly, among the moderate and higher-priced vacuums and those rated highest among repair shops in terms of quality and performance, Dyson and its divergence from the razor and blades business model had no variable costs and provided the lowest cost-of-ownership over a five-year period (see Figure 2). In short, vacuums with no variable costs tend to provide the greatest savings to consumers.

Given their lower-quality and poor customer support, based on test calls to the manufacturers and feedback to a national questionnaire of vacuum repair shops, lower-priced vacuums may not be money well spent, In fact, consumers who purchase inexpensive vacuums, those priced at under $200, may spend a great deal more money over a five year period on the purchase replacement vacuums. Additionally, the study also finds less expensive vacuums to have higher hidden costs. In fact, one low-end, $50 vacuum was found to require $300 in additional costs to operate over a five-year period, assuming average household usage.

While higher-priced vacuums tend to have lower repair costs, most such brands also were found to have high variable costs, resulting in hundreds of dollars of hidden expense. Only one brand, offered at a slightly higher price than its competitors, did not require any additional accessories or any maintenance fees over the five-year period – breaking with the razor and blade model.

Based on the previous charts from the study, it appears, as in other industries, consumers may be much better off paying a little more upfront to buy vacuums with low or no variable costs.

Unfortunately, it is difficult for consumers to identify these hidden costs and that is to the advantage of manufacturers. The lack of information leads many bargain shoppers to buy cheaper and lower-quality brands and models, only to pay much more by using vacuums with higher operation costs.

The answer to the problem is simple – manufacturers should disclose these hidden costs in order to give consumers better information to compare brands and models. This can be accomplished by developing an industry standard, like the VCO. If consumers could find the VCO on the box, on fact tags at the point-of-purchase or on manufacturers’ websites, they would be able to make informed decisions that will better suit their needs and save them money.

In turn, this would encourage competition in the market for vacuums with lower variable costs. Better informed consumers and increased competition is a recipe for maximizing consumer benefits and savings. For consumers, the current system of hidden costs provides neither. The firms with the most cost transparency will likely win in the end.

Steve Pociask is president of the American Consumer Institute Center for Citizen Research, a 501c3 educational and research institute.