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Amazon Sells Kindle Fire at Low Profit Margin to Promote Online Merchandize Sales

01 Oct

An IHS analysis reveals Amazon’s business model for its new Kindle Fire tablet, with the company willing to settle for a razor-thin margin on sales of devices and digital content in order to achieve the larger goal of promoting merchandize sales at its online store.

A preliminary virtual estimate conducted by the IHS iSuppli Teardown Analysis Service places Kindle Fire’s bill of materials (BOM) cost at $191.65. With the addition of manufacturing expenses, the total cost to produce the Kindle Fire rises to $209.63.

When further costs outside of materials and manufacturing are added in—and the $199 price of the tablet is factored along with the expected sales of digital content per device—Amazon is likely to generate a marginal profit of $10 on each Kindle Fire sold.

However, the real benefit of the Kindle Fire to Amazon will not be in selling hardware or digital content. Rather, the Kindle Fire, and the content demand it stimulates, will serve to promote sales of the kinds of physical goods that comprise the majority of Amazon’s business.

The importance of this strategy cannot be underestimated. So far, no retailer has managed to create an umbilical link between digital content and a more conventional retail environment. With Kindle, Amazon has created the most convincing attempt at this yet, and it is doing so by using established retail tactics: deploying content to get shoppers in the door, and then selling them all sorts of other goods. This is exactly how Walmart, Target and others use a similar weapon—in their case, DVDs. If doing this means that Amazon must take a loss on the sales of digital content and tablet hardware, it will be well worth it in the end.

iSuppli’s market intelligence helps technology companies achieve market leadership.

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Posted by on October 1, 2011 in Product Reviews

 

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