Common in today’s world of “freemium” models, group-buying coupons, etc., is the general notion that everything in the Internet Era should be free, or as close to it as possible.
It has made it difficult for some companies to rake in tidy profit margins, but the creative and innovative have made a killing. One popular strategy is the loss-leader: break even or even lose money on a certain product or service to draw in consumers, then generate revenues and profits via cross-selling, up-selling, accessorizing, etc.
One example of this would be Sony and its PS3; the console in itself is a money loss but all the games bought for it afterward deliver the juicy numbers.
CNN tech writer Amy Gahran raised an interesting suggestion surrounding e-readers and e-books, particularly Amazon and its Kindle device, which holds a majority market share. She observes that offering the Kindle for severely discounted or free (under certain circumstances) may get more adopters. The idea is that it’s not about revenue per consumer generated, but simply overall revenue.
Consider a $4 bridge toll. There are, say, 10,000 daily drivers over the bridge, creating $40,000 in revenue to fund the cost of the bridge. But there are many drivers who want to use the bridge but can’t justify the cost. Cut the toll to $2, and you’ll suddenly have 25,000 daily drivers, generating $50,000 in revenue – $10,000 more than with a higher cost, thanks to more “consumers.”
The idea with a free Kindle is that myriad people would snap one up, and in turn buy e-books. This is supported by some very positive research findings: e-book readers read more content overall, they spend more money on content overall, and they’re dedicated to digital content versus traditional content.
So if the e-reading consumers are really that faithful, why not make the initial commitment as accessible as possible? Amazon has a convincing market share, even when you factor in the iPad, which is hardly a fair comparison given that it is a tablet, and not just an e-reader: research from Changewave states that the Kindle holds 47 percent of the e-reader market, with Apple’s iPad holding 32 percent of this market, and Sony’s Reader and the Barnes & Noble Nook at 5 and 4 percent respectively (U.S. numbers). Amazon, safe to say, wants to retain this number.
Amy, for one, believes that if Amazon doesn’t offer Kindles for free, somebody else will offer their e-reading device for free, and close in on market share. In such an instance, it would be a necessarily wise strategy to implement a system in which Kindles can be obtained for free, if not severely discounted. She suggests three different models:
1. Buy X number of Kindle books, get a Kindle free
And maybe the Kindle books you’ve already bought to read on your phone, tablet, or computer might count toward that benchmark.
2. Free Kindles for Amazon Prime members
3. Partner Kindle giveaways
Already some banks have started giving away Kindles to customers. But here’s a more intriguing option, from the London Review of Books: “The New York Times, if it stopped printing a physical edition of the paper, could afford to give every subscriber a free Kindle. Not the standard Kindle, but the one with free global data access. And not just one Kindle, but four Kindles. And not just once, but every year. And that’s using the low estimate for the costs of [their] printing.”
These are good and viable ideas. Amazon should definitely offer at least a bundle package, where ordering X number of books, perhaps five, with an initial Kindle nets you a steep discount on the device – say 50 percent. So, spent maybe thirty bucks – that you would have spent anyway – and save a good hundred on the device. Then the consumer is hooked on the device and becomes a long-term residual revenue generator.
The Prime member idea is also interesting, although there is no correlation between people wanting free year-round shipping and people wanting a Kindle – if anything, these two oppose on another, for e-books do not require shipping. But a steep discount to Kindles for Prime members may serve to entice people who are teetering on the fence: “I’m interested in Prime, but the price isn’t quite justified…” A half-off Kindle could easily be the determining factor.
Given the nature of the e-commerce space, it would make a lot of sense for Amazon and other e-reader makers to consider offering their devices as loss-leaders.
What do you think?