Pricing for the Amazon Kindle: Part II
Posted by Ben Blaney on Thu, Dec 22, 2011 @ 08:00 AM
In this two-part series, I am exploring three classic pricing aspects and how they relate to the Amazon Kindle. This second post will focus on on cost-plus vs. value-based pricing and volume pricing.
Cost-Plus vs. Value-Based Pricing
We all know that cost-plus pricing is sub-optimal, as it misses the opportunity to realize as profit the value inherent in the offering at the price the customer is willing to pay.
On a recent flight – as is my customary practice – I had my Kindle and iPod in the seatback pocket and, while waiting for the electronics-are-okay chime, got chatting to my seatmate. He complained that Kindle books don’t cost much less than paper books. This is clearly a layperson’s thought process – that pricing is cost-based. He was talking only of variable COGS, of course; had he allocated the fixed costs of the R&D and infrastructure to the number of books sold thus far, perhaps his view may have varied. But that’s not the point.
What this tells me is that Amazon is missing the opportunity to sell the value of Kindle versions of books. Selling the value of one’s offering is key to every commercial activity. Having potential customers focus on the price and not the value indicates that the value proposition is not sufficiently compelling and/or voluminous to lodge in consumer’s minds.
Volume Pricing
There are several creative pricing options that Amazon could explore for e-books. For example, if the goal was to drive volume and adoption, how about offering a heavily discounted price to re-purchase e-versions of all of the paper books purchased over the past 12 months? Offering cheap e-book versions of what customer already owns drives usage of some of the value functions that a Kindle device has over a traditional paper book – search, annotation, bookmarks and sharing. It‘s clear that an increase in the number of books a Kindle owner has on their device directly improves the utility of the device, therefore this would driving more sales in the long run.
Amazon could also think about offering a product similar to Amazon Prime for e-books to entice more purchases. If a Kindle book averages $10, offering 60 books for $500 might be attractive for the consumer, and acceptable within Amazon’s margin governance structure.
While aggressive discounting, when improperly evaluated relative to the price-volume trade off, can be a sub-optimal strategy to an organization, there are benefits available to schemes where the customer pays upfront, similar to the reasons that stores and restaurants are so heavily involved in the gift certificate business. First, the vendor gets the revenue immediately for future purchases – and the time value of cash even when cost of capital is low, can be very attractive. Second, there are high rates of non-redemption, which add to operating income.