Amazon Snares Consumers With Break-Even Kindle Pricing
Okay, it may have been one of the least, best kept secrets, but now it’s out there in the open. Amazon.com CEO Jeff Bezos told the BBC that the company sells its Kindle devices at "cost."
For Mr. Bezos, the ultimate success of the Kindle depends on how many e-books, magazine subscriptions, movies, etc. are bought by the owners of the devices.
"We want to make money when people use our devices, not when people buy our devices," he told the BBC. According to Amazon’s research, owners of Kindles increase their consumption of media after purchasing one of the devices.
The Amazon model is distinctly different than that of its rivals. Apple makes the vast majority of its profits through the sale of its devices while downloads of music, for example, deliver returns that are just above the break-even point.
Google, which provides its Android system software at no charge, relies on sales of third-party apps and media sales to make money. Android device manufacturers also need to make a profit on hardware sales.
Discussion Questions
Does Amazon.com’s approach to pricing its Kindle devices put it at an advantage or disadvantage relative to its main rivals in the tablet and media categories?
It’s no surprise that Amazon is focused on content sales for its profits — it started as a bookseller after all. Sure, the more accessible the Kindle is, the more chance of swaying potential users away from costlier competition. Overall though, I think it’s the strength of its relationships with consumers and the content offering that are going to matter most.
Bezos has a winning strategy that has secured Amazon’s long-term success in this mobile market. Only Apple and Google can possibly keep up, so B&N, Samsung, and others will eventually fade. Amazon may not have invented the tablet, but they are giving customers what they want, and that’s a sustainable model.
There’s no question that Amazon’s pricing is in no way disadvantageous and likely an advantage. The company’s goal of driving revenues and profits through usage is akin to that of wireless carriers, who heavily subsidize the cost of hardware for customers.
Amazon’s model is smarter as they at least break-even. The real advantage that Amazon has is its integrated marketplace and breadth of offerings delivered in an always customer-centric manner.
This is a classic approach. Gillette is, arguably, the first, selling the razor at a low price and making the margin on the disposable blades, followed by the copier companies who sell you the copier cheap and then make all the money on the cartridges. These are just two examples.
The money is in the content, not the delivery vehicle.
Advantage Amazon! The model is a winner. They will win the hardware distribution war with the best value for the consumer. Then they will make the profit off of the content and usage. It is a razor and blade scenario for sure.
Amazon’s approach is as old as razors and blades. Give them the razor and they will continue to buy the blades. For Amazon this approach makes sense. They have plenty of content to sell: books, music and movies. Apple and Google have chosen different business models. While each model has plusses and minuses, all three companies are wildly successful.
Isn’t this just the modern version of give them the razor and then sell them the blades? This approach has been used by many retailers who sell complimentary products and services. Certainly it is an advantage if you can lower the cost for the consumer to get to purchase your whatever and then provide the only product/service that works with it.
I heard all the hype over this last week and did not understand it. Amazon has always admitted their devices are a loss leader. But they also offer Amazon software that lets consumers use Amazon content on the PC and iPad. In my mind that is a bigger question, but it only goes to show that Amazon really believes that “content is king.”
The other thing I find so interesting about Amazon is the latest announcement that they are considering buying Texas Instrument’s mobile chip manufacturing. They are really taking “vertical integration” to the ultimate. Not only will they sell the devices, they will be manufacturing their components. An they’re doing all that to make their content available to more consumers.
This gives Amazon a definite advantage, especially considering all of the content available via Amazon. While I don’t have a Kindle (I did but traded it in for an iPad) I still buy content from Amazon and use the Kindle app. This will continue to serve Amazon well.
Actually, this pricing model has been used many times. Most of the computer printer manufacturers use this — sell the printer cheap (probably under cost) and make the profits off of the ink cartridges. Same with razors and high margin replacement razor blades, air purifiers with expensive filters. Green Mountain (Keurig) most likely makes some profit on the sales of the coffee makers, but has a high margin on the K-cups.
The comparison with the tablet category is a little dubious since the apps are not ‘controlled’ by or marketed by the tablet manufacturers. Although I’m sure that Apple makes a nice profit from iTunes from the music industry contracts it’s established. I suppose one could even argue that wireless companies sell the handsets/equipment under cost but make up the margin in sales of data and minute contract plans. It’s just a different way of reallocating the profit generation.
There is no better example that I can think of than the ones mentioned about Gillette giving away the razor to sell the blades. Amazon made it so they are not losing on the Kindle device, which I assume means all costs in addition to the device such as overhead are covered.
Amazon’s model is not only based on the classic Gillette razor/blade approach, but due to ‘break-even pricing’ it has also worked to expand the ‘book’ market and created a hybrid physical-digital experience for the user.
In the US and later in the UK, it took Amazon four and two years respectively for purchases (license to use) of digital books to overtake sale of physical books in those countries. They priced their hardware for growth by making it incredibly easy and affordable to access digital media. They also added convenience of having your own Amazon Cloud Drive.
The Amazon model is a classic one that’s on digital steroids for a new lifestyle. It’s a winner as long as they maintain their innovative ways.
The model will work, until you can get a free razor from one company AND free blades from another (so to speak).
This the classic strategy of giving away the razor so the customer will buy the blades. Amazon.com recognizes the value of the back end. To read digital books, you need the reader. If you can get the reader into the hands of the customer, even if Amaon doesn’t make money on the sale, hopefully the customer will buy books. The back end is exponentially bigger than the sale of the Kindle. Amazon.com is a great role model and case study.
Amazon’s approach leaves them without the dramatic profits of a device that can drive a continued technological growth path. That doesn’t mean Amazon can’t pull it off. But to start with a giveaway forces Amazon into a catch up position. While this may be a near term advantage, it creates a long term strategic weakness.
I think they have a huge advantage within the Kindle’s capabilities. Who doesn’t want to have the maximum performance at the minimum price? I would also point out that the “geek world” spends quite a lot of time on the Kindle and provides all manner of upgrades and hacks for free to those inclined.
Bezos doesn’t do much wrong and I believe he has learned a thing or two from watching Gillette operate for about 50 years. His system is built to deliver “his” content from “his” store to your Kindle. Is there anything that’s not working here?
Amazon is just following the old razor and blade model. Give away the razor and make money on the blades. The profit on blades is higher as they only work with a specific razor. The only issue with this business model is how much must a consumer purchase to make it worthwhile. This is a good model to get trial and Amazon has seen great results. Now the issue is reoccurring revenue and little cost.
Clearly an advantage for Amazon, by selling their product at cost and making money on their other offerings. This follows the proven low-cost razor and profit from the blade model that has been used for years. Amazon is establishing a larger user base, which in turn also increases their audience for all of their other products and partners. The payout is tremendous, and as long as the Kindle breaks even, Amazon keeps making money on everything else it offers or offers through its marketplace partners.
Amazon’s approach puts it at a significant advantage compared to alternatives. Amazon has the ability to defray costs with incremental revenue that comes with a direct pipeline to consumers, in terms of books and many other items that Amazon carries. Pure play tablet companies must cover cost + margin, or develop a revenue sharing model with partner companies to simulate the Amazon model. If they do not, then those tablets will be at a significant cost disadvantage.