The Base-Refill Business Model

Shopping for a new home printer, I found a shelf full of top quality printers at rock-bottom prices; I threw down the cash and ran out the door before the store clerk could double check the price. Three weeks and a few photo albums later, the warning signals flared on my new device: ink cartridge low.

No problem, I thought. I ran down to Office Depot to pick up a few ink cartridges. The price tag hit me like a cold slap in the face followed by a hard right to the jaw. Stunned, Iturned stuttering to the sales clerk, who smiled and said `just one cartridge, sir?'

The base-refill business model has been around since the razor and blade, but is being pursued with new vigor. Huge successes like the Swiffer mop in the US and the Senseo coffee machine in Europe have packaged goods marketers scrambling for innovation in new areas, including durable goods.

The business model for base-refill systems is straightforward: create a large user base that will continue buying the refill.

Three-part price equation

Consider my printer purchase: low priced printer and high priced ink. The printer model (for lack of a better term) is common in the base-refill world:

• Make the initial purchase easy for the consumer by packaging a ready-to-use starter kit
• Don't make the buyer consider extra items or prices that could deter the purchase
• Price the base unit as low as possible to generate high unit sales

The printer model works in many categories, but it can fail. The right pricing decision for a new product involves an understanding of three measures:

• Price elasticity of the base unit
• Price elasticity of the refill
• Usage level for the refill

In most cases, base-unit pricing influences volume far more than the price of refills. Consider the following test case for a cleaning product.

The refill price has less impact (than base price) on starter kit sales. Some consumers simply don't look at the refill when they buy the base unit. However, refill pricing can also influence frequency of repeat and, therefore, longer-term volume potential.

Usage level also plays a key role in the pricing equation. High repeat rates and frequently used products offer more opportunity to take profit from the refill over time.

Performance is crucial

The success of the base-refill model hinges on repeat. When consumers don't buy refills, the marketing options diminish. You can no longer lowball the base-unit price. Base-unit sales potential drops, hence the user base drops, threatening refill sales potential and the ability to maintain refill distribution. Relative to packaged goods, repeat rate norms are very high, driven by high product expectations.

Hit the ground running

Refill sales are non-existent at launch, then start to kick-in after an `installed base' is established. Marketers apply new tactics to synchronize the transition from fledgling to robust repeat business.

Six to twelve months before launching in mass distribution, the rollout starts. Direct marketing, sampling, and online sales create a starter base. Refills are sold direct to the consumer or offered online. Advertising generates awareness, creating pent-up demand.

A mass advertising blitz dovetails with the launch into mass channels. Awareness peaks quickly, driving consumers to the shelf. While refill sales are limited in the first few weeks, retailers are satisfied with droves of buyers from the pre-launch and launch campaigns. The lag time for refill sales has been cut thanks to pre-launch planning--pleasing the trade and securing distribution.

Success breeds.... fierce competition

Competitors will pounce on every success with a `me-too' and a `mine-is-better' quicker than you can read the sales tracker. This battleground is won by estimating competitive moves and preparing for each attack.

The first to enter usually wins the lion's share, as brand identity can become synonymous with the category. Will you grab the Swiffer, even if you own a Clorox Ready-Mop? Will your Tassimo machine be known in the home as a Senseo? Did you TiVo your favorite show last night?

With fast-followers closing in from every direction, how can marketers secure this lead? Again, base-refill systems play by a different set of rules. Rule numero uno remains: build the user base--fast. This means resist the temptation to price high for early profits. Build volume first, as each new purchase for your brand reduces the buying pool for competitors.

The user base itself offers new marketing dynamics. A closed system limits the user base to only the brands you choose. A careful review of patents is necessary for closed systems, as is managing trade. A successful base-refill system also serves as a springboard for innovation, where line-extensions and add-ons are developed for both base and refill. Creating your own `me-too' with a second-generation product leaves you one step ahead of the competition.

Do your homework

Base-refill systems' marketing challenges require new types of preparation. Demand models need to optimize the price mix, test `what-if' competitive scenarios, and model pre-launch activity. Product must deliver on consumer expectations. Secured patents and trade support are needed to establish the closed-system. In case that isn't enough, internal tolerance may need to change from immediate payback to longer-term fulfillment of the refill dividends. Know the base-refill model, and step towards success.

I may have curbed my mass printing habits, but with beautiful photos everywhere I turn, this new printer is here to stay.