People are not getting into fistfights to buy Amazon’s new Kindle Fire, an e-reader and tablet computer. The reason: Kindle simply doesn’t seem to inspire the kind of passion associated with Apple products.
But relatively speaking, the Kindle also doesn’t cost that much. Nor is it meant to. The Kindle is a means to an end: more sales of related Amazon products.
“Amazon’s approach contrasts with rivals like Apple and Samsung, which generate hefty profits from the devices themselves,” Greg Bensinger wrote in today’s Wall Street Journal. “From their introduction two years ago, Amazon’s tablets have stood out chiefly for their low prices and deeply integrated Amazon-specific software.”
Or, as Amazon Chief Executive Jeff Bezos put it in an interview, “We want to make money when people use our devices, not when they buy our devices.”
This is a time-tested pricing model, one that Peter Drucker liked to illustrate through King Gillette, 19th century inventor of the Gillette safety razor.
During that era, men either had to risk using a straight razor on themselves or spend time and money on a barber.
Interestingly, there was no dearth of safety razors. “Many inventors designed a ‘do-it-yourself’ safety razor, yet none could sell it,” Drucker explained in Innovation and Entrepreneurship. “A visit to the barber cost 10 cents and the cheapest safety razor cost $5—an enormous sum in those days when a dollar a day was a good wage.”
Gillette sidestepped this problem. “Gillette did not ‘sell’ the razor,” Drucker wrote. “He practically gave it away by pricing it at 55 cents retail or 20 cents wholesale, not much more than one-fifth of its manufacturing cost. But he designed it so that it could use only his patented blades. These cost him less than one cent apiece to make: he sold them for five cents.”
This worked out well for both customer (who got faster, cheaper shaves with no large outlay upfront) and producer (which still made a lot of money).
As we’ve noted before, the real beauty of such a model is that the company “charges for what represents ‘value’ to the customer rather than what represents ‘cost’ to the supplier.”
In the end, perhaps it’s no surprise that Bezos (for whom we’ve expressed great admiration as an innovator) followed Drucker’s lesson. It was also reported today that he and his senior team spent time this summer reading and discussing Drucker’s The Effective Executive.
What companies do you think ought to consider a different approach to supplier “cost” and customer “value” in their pricing?