An Economic Lesson from the Past

Posted by Dan  at September 3rd, 2009

An enterprising early-American offers inspiration and a review of basic economic principles.

In 1806, Fred Tudor departed Boston and arrived in the Caribbean port of Martinique with a shipload of ice harvested from his dad’s pond in the dead of winter. Despite naysayers, Tudor made the ice last by insulating it with sawdust and hay.

The first day of Tudor’s arrival was a smashing success with people paying high prices for the ice. But the next day brought about a problem. All the ice had been unloaded but, in an act of misguided kindness, the boys at the dock had washed off the insulation. This created a puddle of water and lots of screaming people offering to pay any price for the ice they now missed. Thus, Tudor’s ice idea was a failure.

Tudor returned to Boston, poorer but wiser. Yet he had learned two key parts of marketing—the importance of adequate storage and the profitability of high demand in the face of scarce supplies. He set about raising new capital and bought the rights to harvest ice from several local ponds. Travel got risky as the War of 1812 broke out and he put his plans on hold. After the war, however, Tudor sent a ship to Havana—not with ice but with thick cedar planking and sawdust—and built an icehouse to keep the ice fresh. Then he had ice delivered to test whether the icehouse worked. It did.

Next, Tudor asked for a 10-year exclusive contract to be the sole ice supplier in Cuba and Martinique. No one thought it was a big deal since folks were not used to having ice in those locales. Then he started giving the ice away, especially to bartenders, along with exotic frosty drink recipes. The free ice created a demand, so Tudor began charging higher and higher prices. (Remember, he held exclusive rights.)

This ingenious marketing concept was later adopted by King Gillette and is commonly called the razor or razorblade theory. It works because the company practically gives the razor away and once customers need new blades they find only your blades fit that razor.
Tudor returned to New England, bought up the ice rights of hundreds of ponds and commissioned the manufacture of huge ice saws to cut ice blocks from the ponds. He compounded the strategy throughout the South; it’s been said he invented the mint julep just to sell more ice. For 80 years, Tudor and his heirs were the “Ice Kings” of America, all from a product nature supplies for free. And he became a multimillionaire in the process.