Defensive Strategy

Did Amazon Get the Price Right?

3 Oct 2011  

Last week Amazon announced the launch of the Kindle Fire, a tablet device targeting Apple’s very successful iPad.

One of the most debatable parts of the launch is the price: Amazon set the price at $199, significantly below Apple’s cheapest iPad, which sells for $499.

Many people have attacked Amazon for the pricing move, declaring that the $199 price is simply too low. Indeed, some analysts have studied the likely product costs and determined that at a $199 price Amazon is making very little profit, so little that the Fire could be considered a non-profit venture.

So did Amazon pick the right price?

To understand that situation, it is critical to look at the broader picture. Apple is now flying high, scooping up new customers  round the world. The company has an absurd amount of cash, some incredible products and one of the world’s most coveted brands.

How do you compete with Apple?

You don’t stop Apple by building a slightly better device; the Apple brand will overwhelm even a superior product. You don’t stop Apple with a big innovation; Apple is setting the pace these days.

The cleanest way to differentiate from Apple in a way that people care about is to set a much lower price. Indeed, it might be the only option right now.

The other issue is that Apple is an enormous long-term threat to Amazon. If Apple dominates distribution of media including books, films and songs, then Amazon will take a significant hit. Apple could even enter the world of retailing at some point, directly attacking Amazon’s core business. If Amazon wants to survive it has to slow Apple’s momentum.

Will the Fire beat the iPad? I suspect not. But Amazon doesn’t have to beat the iPad. By creating a viable alternative to the iPad, Amazon will put pressure on Apple, and ensure that the entire world doesn’t become Apple’s domain.

3 Responses

  1. Kishore Nair says:

    In addition to garnering rapid market share from the dramatic price drop, would be gaining a private channel to millions of its customers through which products & media & subscriptions could be sold for years to come. You top that off with Amazon’s unique strengths like their mastery in targeting/cross selling and their innovation in technologies like the cloud – and you get a sales & logistics ecosystem that others can only dream of.

  2. I am also interested in the value of the coverage that amazon received as a result of its shockingly low price point. the media hits alone were substantial and established the fire as more recognizable brand and possible alternative. i am not in the category but was blitzed multiple time with this product news.

  3. Swapnil Wadikar says:

    Thank you for sharing your thought provoking articles – very much enjoy reading them.

    On the price, IMHO, the hardware is not where the money is to be made. Taking a slightly broader perspective and looking at the entire ecosystem around Fire’s revenue generation, Amazon plausibly stands to make loads of money in the form of commissions by selling apps, games, movies, music, TV shows, books, storage, ads, etc.

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