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Give ’em the Razor, Sell ’em the Blades

I’m speaking of Gillette’s strategy in the subject of this post, but it is a business model that several companies have implemented in their product lines. Gillette would give away the base razor, which would then encourage you to re-use it by buying their blades which carried a high profit margin.

HP took a similar tactic with its inkjet printers – they would have gladly given them away in order to get you hooked on purchasing ink. I was once told that if you did the math on HP ink, it’s retail price would come out somewhere around $10,000 a gallon. And you thought a gallon of gas was expensive these days. What HP found was that when it came to technology, if it did not cost money, people would assume it was inferior. So they set out selling those inkjet printers for anywhere between $49 and $129 dollars and would gladly bundle free ones in with laptop and desktop purchases to in order to secure the future income stream from ink.

It looks like Amazon has bought into this model with the Kindle Fire. This makes sense given their moves into a streaming video provider, cloud music purveyor, and digital book seller. Amazon’s value chain was already highly optimized for cost, allowing them to sell dead trees with printing on them for 30% less than bricks and mortar retailers. Imagine their profitability if they are the de-facto leader in electronic books and they are able to scale back the size of their distribution operations. So – give ’em the Kindle, sell ’em the e-books and movies. A recent FastCompany article points out Amazon’s point of leverage:

The Kindle Fires maker also happens to be the worlds largest online retailer, and it can leverage that position to stomach a short-term hit for a long-term future of getting more customers hooked addicted on Amazons services and content.

The fire easily serves up books and movies, and I’m assuming it handles games as well. By taking a small loss on the device, Amazon is poised to fuel sales in its content channel for the next 2-3 years. Seems like a smart move to me.

via Why Amazon Isnt Sweating Losing Millions On The Kindle Fire | Fast Company.

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