Did Amazon Leave Money on the Table?

Recently, Amazon introduced Kindle2. This e-Book reader is thinner and faster than its predecessor, which itself is only about a year old. One thing the new Kindle2 is not is cheaper than its predecessor. It carries the same $359 price tag.

The question is, did Amazon leave money on the table? Certainly, you can make a case for Amazon’s holding the price at $359. The new device is better than the previous device. In addition, the previous device sold out over the Christmas season of 2008.

On the other hand, you can make a case for a lower price point. History says that a lower price might help. First, in May of 2008, Amazon lowered the price of the original Kindle from $399 to $359 and sales increased notably. Second, Amazon has sold well over 500,000 of the original Kindles. The resultant economies of scale should have increased the margins of the new product over the old. Third, there seems to be a magic price level of about $250 that causes a consumer product to really take off with the masses. For example, the iPod Classic sells for $249. How many more Kindle2s could Amazon sell at $249 rather than $359? Finally, the Kindle2 might be something like the razor. In order to use it, the customer has to download books from Amazon. These books also bring additional revenues and margins. How many of these books will not be sold at $359 per Kindle that might have been sold at a $249 Kindle? (See the Symptom and Implication, “Prices on niche products continue to rise while other prices fall” on StrategyStreet.com.)

Posted 2/23/09