Amazon currently charges $9.99 for most books, which, according to AppleInsider, means that Amazon is losing $4.50 per book to keep its leadership position in the eBook market and keep Kindles selling. This strategy is similar to the loss-leader marketing popularized by Gillette who sold razors at a loss in the hopes of more than making up for it in the sales of blades.
Uh, no. That strategy is, in some sense, the opposite of selling razors at a loss and making it up in the sale of blades.
In order to understand this apparently complex system, you need to understand one way of dividing objects into two categories: capital, or consumable.
Capital is something which makes value, or enables making value. As a rule, it is a relatively fixed cost which is paid regardless of the amount of production. For example: manufacturing equipment is capital. The Gillette razor is, conceptually, capital -- because its cost does not vary with the number of shaves.
The opposite of Capital (in this simplistic view) is Consumable. Consumables are used (and generally used up) in the creation of value. The raw materials converted by Capital into value (and used up in the process) are Consumables. In the Gillette example, blades are consumables because the total cost of blades varies directly with the number of shaves. EBooks are a Consumable.
So let's go back and take a look at that quote again, with my inserts in italics:
In other words, selling consumables at a loss to keep selling capital is the same as selling capital at a loss in order to sell consumables.Amazon currently charges $9.99 for most books (consumables), which, according to AppleInsider, means that Amazon is losing $4.50 per book to keep its leadership position in the eBook market and keep Kindles (capital) selling. This strategy is similar to the loss-leader marketing popularized by Gillette who sold razors (capital) at a loss in the hopes of more than making up for it in the sales of blades (consumables).
Riiiiiiiight.
Let's start again: what Amazon does, presumably, is price the consumables (eBooks) low so that it will drive sales of the capital device (Kindle). What Gillette did was price the capital device (the razor) low to lock users into purchases of relatively expensive consumables (blades).
Those are not the same thing. Amazon is (probably) trying to gain market share for the Kindle regardless of profitability so they can sell eBooks at a loss in hopes that they can seize the market and make it profitable later. Gillette was trying to gain market share for the razor so they could sell blades at a tremendous markup and be profitable now.
Clear?
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