82-Did Amazon Leave Money on the Table?

Amazon is a dominant and exceptionally unusual market leader. It dominates the two industries in this blog and follows the same strategy in both. The first industry is in overcapacity but is not Hostile. You will rarely see that. The second industry has some formidable competition and grows slowly. Still, the competition finds it difficult to mount a significant challenge to Amazon. This blog outlines Amazon’s strategy and the keys to its success.

Posted 2/23/09

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.)

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Update 2022:

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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Update 3/26

Amazon is the dominant player in at least two separate businesses. These businesses diverge from one another in products and competitors and have a slight overlap in customers. Amazon’s ability to dominate both businesses demonstrates what a great industry leader does to outshine competitors in its business. It is a go-to strategic example.

The two businesses are Ereader hardware and e-book sales. Amazon has over 70% market share in the first business and about 65% in the second. No one else comes close in either business. Kobo has about 15% share and Nook has another 8% in the E  reader business. The E reader hardware business is shrinking quickly. The e-book sales business is growing slowly. In this market, Amazon confronts more formidable competitors.

As we get started in this Blog, let me answer the question that jumped out at me about both businesses. Where are the Chinese? They are so important in other electronics businesses. Well, it turns out they do own 70% of the market. We don’t see much of them in the West because their E readers are produced almost solely for the Chinese market. They have very little presence in the West.

Let’s begin with the E reader market. This market is in a sharp decline. In 2025, it sold only two thirds of the units it had sold five years earlier. Tablets and phones have become the reader devices of choice. Younger consumers have little interest in dedicated E readers. The E readers remain device of choice for the industry’s Very Large, heavy, readers. More casual readers prefer phones and tablets, which are more Convenient than dedicated E readers. Even as this industry shrinks, Amazon’s market share continues to grow slowly. Here is an explanation of how they have become so dominant, using the four components of the Customer Buying Hierarchy.

Function. Amazon is far and away the Function leader in the industry. It covers each of the three Price Points in the market. It has the industry’s lowest Price Leader entry-level product at $110. It saturates the Standard Leader $150-$200 price points with several products. It also flanks the Performance Leader high-end product price points with industry-leading Function benefits. Its competitors cannot offer much that Amazon does not already offer.. The remaining competitors compete with benefits appealing to limited customer segments. Kobo serves library users, offers EPUB – friendly readers and has larger screens and better color capability, Function benefits with limited appeal. Nook depends on its ownership by Barnes and Noble where it offers Convenience to those customers. It is in a long-term decline.

Reliability. Amazon enjoys the industry’s best Reliability reputation, especially because it is such a dominant market share leader with so many awards and third-party quality reviews.

Convenience. Amazon leads in Convenience with its online sales process. Still, there was little to differentiate competitors on this component of the Customer Buying Hierarchy.

Price. Amazon maintains the low price at all Price Points. The company maintains an overwhelming scale advantage compared to all of its competitors. It uses that scale advantage to discourage any competitor from offering a lower price in competition with the company. No competitor could offer a lower price without unacceptably damaging its margins. The trade-off in its razor and blade strategy is that the company makes little money in the hardware business. As we explain below, there may be some opportunity to improve that situation.

So where could you compete with Amazon in the E reader market? Really, nowhere. If a competitor found a Function improvement with significant volume potential, Amazon could quickly duplicate it. There is little room to match or improve on Amazon’s Reliability. Convenience, as well, seems to offer no pathway to true competition. No company can compete with Amazon on Price today without having much greater scale.

Returning to our original question of several years ago, is Amazon leaving money on the table. I think they are in 2026. Recalling that the strategic effect of price is to discourage a competitor from competing with you, there is little likelihood that Amazon would attract significant competition with somewhat higher prices. How many potential new competitors want to enter a drastically shrinking market? Which of the existing competitors today has any hope of daring to complete with Amazon on Price? Amazon prices its E reader products at near cost. They could add a few more margin points without fearing new competition.

Now let’s turn to the E book sales market. This market is growing slowly and has more potentially formidable competitors, including Apple and Google. Here, again, Amazon dominates its market as we can see using the Customer Buying Hierarchy.

Function. Amazon is the overwhelming leader here as it offers far more title choices than any other competitor. For example, it offers 12 million titles in the Kindle store. Apple offers fewer than 4 million, as does Nook. Kobo offers 6 million and Google offers 5 million. Amazon has over a billion book downloads annually. Compare that with less than 250 million for Apple, less than 150 million for Google, less than 120 million for Kobo and about 25 million for Nook. In terms of market share, Kindle has 65 to 70%, Apple has 10 to 15%, Google at 6 to 8%, Kobo at 5 to 7% and Nook at under 2%. Amazon dominates both catalog size and download volume.

Reliability. As the industry’s dominant leader, Amazon wears the title of the industry’s top Reliability competitor. Dominant industry leadership always confers the Reliability crown on the leader. Certainly, Apple and Google also enjoy top Reliability reputations with their traditional customers. Still, many of those customers continue to purchase E books from Amazon.

Convenience. Customers select, pay for and download E books online with little to no friction. There are some advantages in selection and others from staying within a competitor’s ecosystem. These advantages have helped Apple and Google with their traditional customers but have not challenged Amazon in a significant way. Importantly, Amazon’s books run on the operating systems of all its competitors.

Price. Amazon’s approach to pricing in this market mirrors its tactics with the hardware E reader market. It is the low-price option for any product Price Point. Many of the best seller books have prices determined by agency contracts.  Here, Amazon prices are the same as those of the rest of the market. But, where Amazon controls the price, it offers a low price. Rough estimates put Amazon’s averagedownload price at $7.25, Google at $7.50, Kobo at $8.00, Nook at $8.50 and Apple at $9.00. This low-price philosophy surely discourages aggressive Price competition.

Again, how do you hope to compete for industry leadership with Amazon in this market? Amazon offers little in the way of competitive windows. It leads on Function, Reliability, Convenience and Price. It has the industry’s dominant scale to threaten would be challengers. It may have some margin improving price potential here but that would be a risky move in a market where Amazon already makes so much money. Why tempt fate?

In summary, Amazon shows us how to be a dominant industry leader over the long term. It has shown us the roadmap in two separate industries.

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