The following reprint from Recharger Magazine of a research report prepared by Lyra Research, describes in detail how printer manufacturers rely on the sale of high-priced brand name printer consumables to recoup their losses on inkjet printers. 

 

For original equipment manufacturers (OEMs) of personal inkjet or personal laser printers, long-term profitability is dependent on printer usage and sales of OEM consumables. Personal printers are typically inkjet or laser devices used by consumers, small offices/home offices, and small businesses. This market accounts for a tremendous volume of printer hardware shipments, mainly inkjet devices, but laser printers are gaining popularity with this group of users.

Most manufacturers of personal printers sell the hardware at a loss and rely on revenue from the sale of replacement ink or toner cartridges over the printer’s life to achieve a profit. This business model is typically called the “razor and blades” strategy after the model developed by King C. Gillette at the turn of the 20th century to sell razor handles and disposable razor blades. While Gillette Company made no money or even lost money on the initial sale of a razor, it realized a profitable annuity from the sale of numerous razor blades over the razor’s life.

Just how does the aftermarket fit into the “razor and blades” profit strategy of printer OEMs? The short answer is that it doesn’t. If a consumer purchases aftermarket supplies in place of OEM supplies or even experiments with aftermarket supplies, purchasing a third-party cartridge or two in place of an OEM cartridge, this profit model can be destroyed. This article, based on a recent Lyra Research report called Consumer/SOHO/SMB Markets: Big Volumes, Low Profits, examines how long it takes a printer OEM to recoup its initial loss on the sale of low-priced printer hardware by selling supplies. It may surprise some aftermarket vendors to learn how little OEMs typically make over the life of a printer.

Can Printer Vendors Profit from a $100 Inkjet Printer?

Printer OEMs can realize a profit from an average $100 inkjet printer, which Lyra assumes has a life of approximately three years, if OEM supplies are used. Lyra estimates that a vendor’s loss on the initial sale of a typical $100 inkjet printer is about $30. If the device has an average monthly page volume of about 100 pages and the user regularly prints in both color and black and white, Lyra estimates that the sale of OEM supplies will make the printer profitable at its 199th day of usage (see Figure 1). Over a three-year period, this particular printer will net the OEM about $160 in profit. Figure 1: Printer life-cycle profitability: $100 inkjet printer.

What About a $50 Inkjet Printer?

Lyra assumes that the average monthly page volume of a $50 inkjet printer is about half that of a $100 inkjet printer, or about 50 pages. The smaller page volume means that users purchase fewer cartridges, making it difficult for the printer OEM to recognize a profit. In this scenario, the breakeven point is 242 days, and the total profit over three years is $79 (see Figure 2), less than half the profit gleaned from the sale of a $100 inkjet. Some customers who pay $50 or less for an inkjet printer may not replace their cartridges at all — an issue of concern for both printer OEMs and aftermarket supplies vendors. When buying replacement cartridges can cost as much as the printer itself, some users will opt to purchase a new printer rather than replace empty cartridges.

OEM Strategies to Combat Aftermarket Cartridge Use

The profitability scenarios described above assume that the printer owner purchases OEM supplies. What happens to the profitability outlook for a personal printer if a user purchases only aftermarket supplies? The razor-and-blades profitability strategy no longer works, and aftermarket vendors usurp all thLe profit that the OEM would have made from the sale of supplies. Thus, the OEM’s initial loss of $30 on printer hardware becomes permanent. Aftermarket supplies, including store-brand cartridges and those refilled at retail shops, thus pose an enormous threat to personal printer vendors. Even if a printer user experiments with aftermarket supplies, purchasing some OEM and some third-party supplies, it has the potential to upset the proverbial apple cart, making a printer no longer profitable for its manufacturer.

What actions are OEMs taking to discourage the use of aftermarket cartridges? Many have branded their inks and are stressing ink performance, quality, and longevity in their marketing. Often, inkjet vendors market their hardware, ink, and media as a “system” that works best when all components are used together. Other strategies include vigorously guarding their intellectual property, as the aftermarket has seen with recent lawsuits. Product life cycles have been shortened to shorten supplies life cycles, forcing aftermarket vendors to develop more SKUs, which cuts into profits. Some inkjet OEMs have introduced low-yield cartridges at lower price points to compete with aftermarket cartridges. Inkjet vendors are also promoting recycling programs with prepaid return mailers. This reduces the supply of empty cartridges, increasing costs for the remanufacturer.

Founded in 1991, Lyra Research is recognized worldwide as a leading provider of market, product, and technology information and analysis focused on the imaging industry. Lyra Research provides targeted information on printers and copiers, digital photography, and imaging supplies to more than 2,000 clients in more than 40 countries. Contact Sandy Tobin at (617) 454-2612 for more information on Lyra’s newsletters, reports, and services.