80-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

Update:

Amazon has adopted the razor and razor blade strategy.  The first Kindle came out at the end of 2007 at a price of $399.  Since that time there have been more than 20 new Kindle products introduced to the market.  Among the products on offer in 2022 we find: the Paperwhite, Paperwhite for kids, Paperwhite Signature Edition, Kindle with front light, Kindle Kids Edition and Kindle Oasis.  In 2021, the Kindle Paperwhite had a list price ranging from $139.99 to $189.99.  Discounted versions started at $104.99.

Since the introduction of the original Kindle in 2007, Amazon has sold tens of millions of Kindles. In 2022 it was by far the most popular E reader on the market.  Its market share exceeded 80% of the E reader market. As more people use their tablets to read, the pure E reader market is declining slowly. Amazon makes money with its Kindle product but the profits are modest. The company depends on selling e-books to make its profits. The razor and razor blade pricing strategy is working well for Amazon now that its quality hardware has a low purchase price.

If Amazon chooses to do so, it probably has an opportunity to create more profits with its hardware product, without losing many customers or encouraging more competition. That decision largely rests on the profitability of the total Kindle plus e-book product package. See HERE for more thoughts on the price outlook for an industry.

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THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.