221-The Kindle as a Razor

Amazon is proving to be a stubborn competitor. Many people thought Amazon would be severely damaged by the market entrance of the Apple iPad. After all, the iPad does many more things than simply provide an eBook reading experience. But, the Kindle is not going away easily. The company claims that it appeals to “serious readers,” which it estimates at about 10% of the population, and Amazon is chasing that 10% avidly.

Amazon is using the Kindle as a Loss Leader. Recently, a company estimated that the cost of the Kindle, that is all its parts and labor, was about $185. Amazon claims that the cost is much higher. This cost was not a great deal of the problem when the Kindle2 sold for $400, about its introductory price. Nor was it a problem when the Kindle sold for $289, the cost of the second version. Now, the new and improved Kindle3 has a price as low as $139, well below the estimated $185 cost. Amazon is taking a significant haircut on the cost of the Kindle in order to populate future customers for its eBooks. The company makes an attractive profit on its eBook sales and uses the Kindle as the razor to its eBook razorblades.

Amazon has also hedged its bet. Kindle eBooks also are readable on the iPad, so we are about to see an interesting contest between a very inexpensive Kindle and the iPad for the eyes of future eBook readers.

This razor and razorblade strategy is common (see StrategyStreet.com/Improve/Pricing/Reduce Prices). Here are some of the other places it has taken place:

• Caterpillar often reduced prices on new equipment in order to assure itself of the replacement parts business.

• The Palm Trio 600 had a list price of $600, but a consumer could buy it for as little as $330 with a phone service contract.

• Nintendo subsidized the sale of its game consoles in order to boost the sales of its game software.

• Restaurants offer free, or inexpensive, appetizers at the bar in order to increase alcohol sales.

• Charles Schwab offered a $400 analysis of a client’s holdings, including two hours worth of in-person advice, in order to increase the odds that it would be able to manage the client’s money for a yearly fee.

These Loss Leader pricing innovations are worthwhile whenever the revenues from the attendant products, which follow the Loss Leader product, are worth considerably more than is the Loss Leader.

Posted 9/30/10

Update:

Amazon is a powerful competitor in the e-book market, but it faces some difficult headwinds. Its US market for e-readers is shrinking and the profitability of e-books has fallen as prices have come under pressure over the last several years.

The potential global market for e-books is large but slow growing. Globally, there are already over 900 million e-book users with a worldwide penetration of e-book consumers at 12%. The market is growing at about 3% a year. China has the largest penetration for e-books at 25%. The US follows at 20%.

The market growth for dedicated ereaders has fallen to about 3% a year. Consumers over the last few years have increasingly chosen to read e-books on tablets or smart phones, where Amazon is less strong than some of its larger competitors. In 2022, Amazon was the number three competitor in the worldwide tablet market. The leader was Apple with a 32% share, followed by Samsung at 21%, then by Amazon at 10%. However, in the dedicated ereader market, Amazon was the dominant leader with 84% of the market. Kobo was a distant follower at 13%.

The profitability of e-books is lower than it was a few years ago. E-books are a low value product, generally selling in the range of $3 to $10 per book. In comparison, a paperback version of a book might sell for $20. And Kindle versions of hardback books generally are more than 30% less expensive than are the hardback versions.

Both ereaders and iphones are Next Leader products, Transformers. The Kindle certainly impacted the book market but it was superseded by another Transformer product, the smart phone. See HERE and HERE for an explanation of the two types of Next Leader products.

10/22

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