Fun Fact: Amazon Actually Loses Money on the Kindle Fire HD

The use of ‘loss leaders’ has been a common tactic of traditional retail stores for many years. The idea is to use a deeply discounted sale item to draw customers into the store in hopes that, once there, they will see other regularly priced items they like and make further purchases. Amazon is using this concept with the Kindle Fire HD, serving as the loss leader sale item. Since the cost of producing the Kindle Fire HD is greater than its sale price, Amazon hopes its entry into a new arena, the tablet market, will expand its customer base so that sales will increase in other product areas. Amazon is apparently betting on the Kindle Fire HD serving as a shopping gateway in a way that a simple ebook reader could never do.

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While Amazon is engaged in intense competition selling books and movie DVDs against Barnes and Noble, Google Books, and Borders, the price margins in these markets are very low and any attempt to recoup the cost of a subsidized tablet computer based on increased market share only in these areas is a risky proposition. One major advantage for Amazon is that it also offers an online store with an enormous inventory, and it is here where the Kindle Fire HD’s potential to increase buyer traffic makes sense. As pointed out in our review of Kindle Fire HD, some consider it to be the primary competition for the iPad 2. And since it bears many similarities in functional intent to Amazon’s new tablet, some look at the Barnes and Noble’s Nook Color as the competition for the Kindle Fire HD. Since any of the three represents a reasonable alternative for the other two, a comparison of the three tablets follows.

The main difference either the Nook Color or Kindle Fire HD has with the iPad2 is that the first two tablets are scaled down in terms of functionality in some key areas. Both Amazon and Barnes and Noble conducted market research of potential tablet buyers, determining which features were of lesser importance. So while their new devices had plenty of room for ebooks, music, photos and movies, they lacked a camera, were WiFi only and required no service providers, which eliminates any associated monthly fee. And assuming most tablet buyers would also own a smartphone, neither the Kindle Fire HD nor the Nook Color has either Bluetooth or GPS, since a smaller and more easily handled smartphone would meet any telecommunications needs with the tablet’s IP addresses being available for location based applications.

But there are also important similarities between all three tablets. In many areas – tablet size, screen size, processing speed – either the Kindle Fire HD or Nook Color are clearly on the same level as the iPad2 and can be had at a much lower cost. The Kindle Fire HD also provides access to the Android market, and both it and the Nook Color access the cloud for memory intensive activities. Both the Kindle Fire HD and Nook Color costs about $249 to make. While Barnes and Noble went to market with a price that covered their cost of production, Amazon undercut the Nook Color’s price by $50, selling the Kindle Fire HD at a loss, in hopes that it will gain market share and in turn create a broader customer base. Considering the reaction to the Kindle Fire HD, it appears this strategy may be working, with Amazon recovering any loss on the Kindle Fire HD through increased sales across all areas of their business.

 

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