Amazon Pricing Strategy: Bundling Its Way into a Competitive Position

November 18, 2011 by

Bundle Your Way to Higher Sales

Image provided by: etsy.com

Last week, I wrote a blog post about the Amazon Kindle Fire marketing strategy and the gamble that the Amazon executive team is making in subsidizing their tablet offering. As I discussed in my previous post, Amazon is not that interested in the tablet space; rather, it sees market entry into the tablet space as:

  1. A necessary means to expand the digital content market to include less affluent consumers and young people with a high propensity to consume digital content;
  2. An opportunity to introduce its services to this new user group as they are experimenting with digital content.

This week I will delve further into this discussion, analyze the Amazon Pricing Strategy and share why I believe the success of Amazon’s digital content services and marketplace strategy is directly tied to the Amazon pricing strategy and its ability to effectively bundle services in a way that makes them more attractive to consumers.

Based on the history of digital product sales in the e-commerce space, customer loyalty only extends a little further than the bottom line. Price is usually the determinant of a sale in most digital content markets unless a digital content seller is able to differentiate their products by offering additional services to enhance the value of their digital content offerings. Amazon was able to do so early-on with its e-book market by introducing an application to allow Amazon e-book purchasers to lend their e-books to another Amazon user. This allowed Amazon to exploit the network effect of being the largest seller of digital e-books. Amazon was also able to utilize its oligopsony power to pressure publishers to offer volume discounts that can give it a pricing edge over competitors as well. These tactics have worked well in the e-book space.

However, Amazon’s interests extend beyond the e-book marketplace and into digital content areas like movies, television and music where Amazon does not benefit from monopsony or oligopsony power and consequently has a harder time winning the price wars with other sellers like iTunes. This has made it difficult for Amazon to compete in these spaces.

In order for Amazon to compete in the digital content spaces where it is not a market leader, Amazon needs to:

  1. Alter the Amazon Pricing Strategy by packaging its digital content into services, so that it can create more loyal customers, who will generate a constant revenue stream. Amazon has attempted to do this with its new Kindle Lending Library program that it is offering to its Prime customers who own Kindles and Kindle Fires. If Amazon can prove to the big 6 publishers that this is a viable business model, then offering an e-book subscription service could be a great way to transform occasional e-book purchasers into loyal Amazon customers and a continuous subscription-based revenue stream.
  2. Alter the Amazon Pricing Strategy by packaging its movie and television streaming services alongside its other rental services, so that consumers will see its offering as competitive with Netflix, even though they do not have as large of a content library at this point. Amazon already bundles its movie and television streaming services with its Prime membership. However, Amazon added these services to Prime without upping the annual subscription fee, so Amazon is effectively eating the costs for this additional service in an attempt to grow its Prime subscribership. This is not a bad idea in the short term while Amazon is trying to establish its presence in the streaming space, so that it can effectively negotiate movie streaming agreements with the major television and movie producers. However, long-term, it probably makes more sense to offer its content services in a separate subscription bundle and/or increase the cost of the Prime membership package that contains access to these content services.
  3. Alter the Amazon Pricing Strategy by selling a Kindle Fire bundle that includes a 1-year Prime membership, as this would probably rapidly increase the number of Kindle Fire users who opt to subscribe to the Prime membership services.

The key to Amazon’s success with its digital content strategy is that it needs to transform its customer base into loyal subscribers instead of occasional buyers or renters, as the margins for service subscribers will be much higher and revenue streams will be predictable. If Amazon fails to increase its Prime subscriber base, it will be very difficult to make the Kindle Fire subsidized pricing strategy worthwhile in the long-run. However, creating other service bundles could also be another way to increase the loyalty of their customer base and drive up their margins to make the strategy worthwhile.

I am interested to see how the Kindle Fire marketing strategy will work out for Jeff Bezos and the rest of the Amazon executive team.

If you are interested in reading more about pricing strategies, I highly recommend reading David Skok’s blog post on SaaS pricing strategies.  Similarly, if you are interested in learning more about bundle pricing strategies, I also recommend reading Anthony Tjan’s blog post on the pros and cons of bundled pricing.