Neal Freeland

Engineering/marketing manager, family guy. My personal blog with a few work thoughts mixed in.

Kindle Pricing is Below Cost, So How Will Amazon Make Money?

with one comment

The Kindle Fire costs a mere $200. How does Amazon charge this little for a tablet when iSuppli estimates it costs $210 to manufacture? Many publications have noted that Amazon plans to make money by tightly integrating their services into the device. They’ll make money when people shop at Amazon.

This is the classic two-part pricing strategy: sell the razor below cost and then make up for it by selling high-margin razor blades. HP does this with printers and ink cartridges, and Xbox with the console and game titles. However, I don’t understand why people think this is Amazon’s strategy. Amazon only has razor-thin 2% profit margin, and 22% gross margin. This is not the classic profile of a successful two-part pricing strategy.

So what is Amazon up to? I think they have spotted a major transition moment in technology, very similar to what CEO Jeff Bezos saw in the 90’s when he founded Amazon. They believe they can become a major player in the next wave of devices plus services. They have many of the critical capabilities and assets necessary to compete: a world-class store, massive cloud services, extensive media relationships, a favorable brand, and deep customer loyalty. They now have the ability to build compelling devices and even browsers. Five years ago I would never have thought they would be this well positioned to compete with Microsoft, Apple, and Google. Truly amazing.

I’ve pre-ordered my Kindle Fire. I’m really curious about Silk (their custom browser), it’s a relatively cheap device, and I’m tired of the kids always fighting over what to watch on TV or the iPad. Heck, eventually I’m sure all three kids will have their own tablet. The third one will be Windows 8 tablet next year. I’m really looking forward to that one!


Written by nealfreeland

October 9, 2011 at 7:59 pm

Posted in Uncategorized

One Response

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  1. […] a book into my cart. I ended up having to go to the PC to complete my actions. Since the goal of a subsidized device is to increase shopping attach, these seemed like a significant […]

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