Is Amazon actually losing money with each Kindle Fire sold?

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Charging $199 for a tablet is no easy accomplishment for any company, yet Amazon hit that golden price point today with the new Kindle Fire. But analyst Gene Munster of Piper Jaffray predicts the company may be sacrificing money to get there. According to him, “Amazon is likely losing $50 per Kindle Fire.” For every time you spend money on a Fire, so is Amazon.

First, it’s important to note that Munster very well could have pulled that prediction right out of thin air, since he did not cite any of his sources. Second, if this proves true, why would Amazon price the Kindle Fire so low that it would actually lose money? Talk about thin profit margins.

Every time you turn on your Kindle Fire, you automatically enter Amazon’s world. There’s the app store, the music store, the e-book store, and of course the main online shopping website we’re all familiar with that sells just about every product you can imagine. It appears the company is placing a very dangerous bet on this tablet. Amazon is hoping to gain that $50 back (plus more for legitimate profit) from the consumer’s purchases made from the device. Chances are that each user is much more likely to buy more content from Amazon after buying the Kindle Fire than if they didn’t own one at all.

Still, it’s a big risk to take. Let’s say it takes about $225 to build each Kindle Fire, so Amazon priced it at $229 to make $4 off each one sold. Something is better than nothing right? In this case, the circumstances are different. Amazon cleverly priced its tablet using psychological marketing. Somehow, a product that sells for $199 seems considerably cheaper than something that sells for $201, doesn’t it? That explains why that product you bought in the store the other day goes for $9.99 instead of a flat $10. It’s also why Amazon was criticized for pricing the original Kindle with Special Offers at $114 instead of $99. Consumers buy more or less based on the digits.

Until we learn more about Amazon’s profit margins on the Kindle Fire or lack thereof, we’ll have to label Jaffray’s prediction as just speculation. It will be interesting to see how this pricing strategy works out for Amazon, though. So far, it’s working out just fine for customers.

[via All Things D]

  • http://vhirsch.com/blog Volker Hirsch

    What kind of maths is this? The $10 vs $9.99 example surely doesn’t make up for a 20% loss ($199 vs $250 as per Jefferies – who are not really that dodgy, are they?), or does it? It probably is the Android Store and margins hidden in there and on the Kindle Store, I would suppose. But can I suggest you look into this a little deeper next time? Thank you!

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