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Amazon: The Company Who Gets Econ 101

November 27th, 2011 · No Comments · Addicted to Margins

There, was that so hard?

Kudos to Amazon. Their latest tablet was announced with a realistic price point. Unlike all(?) of the other competitors hoping to take on the iPad, they realized a basic truth that applies almost (but not quite) universally: If you are up against an entrenched competitor with a higher perceived value proposition you must charge less to compete.

Amazon’s refreshing reality-based strategy stands in sharp contrast to other notable suicidal and arrogant marketing plays: Microsoft’s Zune launch (same pricing as the iPod) and HP’s tablet (same price as the iPad).

I’ve been flummoxed trying to understand how any Fortune 500 company that wants to take on Apple can’t find in their gigantic Harvard and Stanford grad pool someone who took Econ 101 or doesn’t have some staffer who’s seen a demand curve. At least talk to an old-timer on staff who remembers how well the “costs less” strategy worked in the Windows/Mac battle of the 80’s and 90’s. I remember all too well how it seemed everyone I knew in 1989 really wanted a Mac — but went PC because they were half the price. Thanks to those fat, addictive profits per unit, Apple almost “margined” themselves right out of business.

I think it’s a combination of hubris, “We’re amazingco! We have millions of happy customers! Check out our shiny, big campus!” Along with the common addicted-to-margins syndrome. Especially bizarre to think margins are better than volume when you are trying to launch/expand a new platform and developer base.

I understand that it’s tougher now — that these days Apple’s pricing makes it difficult to undercut them and still turn a profit, fine — then don’t turn a profit. Given how beloved the iPad is, Apple’s amazing logistics, and the huge developer base they have, this is the reality you newbies face entering the market:

* Profit on each unit sold
* Significant/satisfactory quantities sold
* iPad spec parity

Pick two. You only get two.

Pricing matters. especially now in a tough economy.

Amazon’s new Kindle Fire costs $199.


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