Have you ever heard of the "razor and blades business model?"
The concept is pretty simple: give people the razor for free and make all of your money by selling them the razor blades. It’s a model that many computer printer companies have deployed (you get the printer for $99, but wait until you see what the toner costs!). On Thursday, Amazon‘s founder and Chief Executive Officer, Jeff Bezos, confirmed that the company sells their highly popular Kindle "at cost." Yes, they make no money on all of those Kindle devices, that we all can’t wait to get our grubby little hands all over.
It doesn’t seem like a smart business model… or does it?
In a world where Apple not only sells their iPad (ranging from $400 – $900) and also controls the majority of the content that you can put on it from iTunes, why wouldn’t they deploy a similar model to Amazon’s in the hopes of owning the consumer by way of the hardware? It’s amazing how divergent Apple and Amazon’s business models are. One could argue, that this is the right play for Amazon, as they are the ones who have to catch up to the deep penetration that Apple and iTunes has in this space.
Actually, it’s not about Apple. It’s about the consumer.
Amazon should give the Kindle away (or bundle it with $200 of free content via the Amazon store). Much like the razor and blades business model, it’s not about the device. It’s about the cumulative and ongoing buying of content (books, music, movies, TV shows, magazine and more) that Amazon offers. In fact, even that is shortsighted. Amazon has something very incredible that Apple doesn’t even have: an advertising and media empire. Tie this thought into the recent news of Amazon becoming very public about their media and advertising models (before moving any further, please read this article: Advertising Becomes Amazon’s Newest Low-Price Weapon) and you can see how hard retailers will struggle to beat Amazon. There is a secret that Amazon holds that not many people know: they make a lot of money in media based on targeting messages to their consumer base. As it has been explained to me by many senior media executives, the number of media dollars per consumer that Amazon makes is significantly higher than anybody else.
Framing the conversation.
To understand this better: Amazon is typically the cheapest retailer. But, if they’re selling something for 15% less than Best Buy, how can anybody compete with them? Well, if Amazon is getting close to ten times the amount of money that their competitor is getting because they’re marketing to their consumers, the truth is that Amazon could probably sell physical goods to consumers at less than cost price, and still make more overall profit than a traditional retailer. I’m not making this stuff up. While Amazon is not releasing their numbers, it is a known truth amongst those in the know (and I’ve been told this by people on both the brand and agency side).
The profit isn’t in the hardware or software… it’s in the targeted marketing as well.
What does Amazon know about you, your buying habits and your lifestyle? In short: everything. They know all of your personal information (who you are, where you live, where you work, your credit card information, etc…). They know your buying habits (what you have bought, what you have looked at, what they have recommended to you, what you have recommended to others, what you have saved to your wish list and more). They now have a deep contextual understanding about you (the type of movies you order, music you listen to, books you are searching for) that far exceeds the type of data that is captured in traditional media. This wealth of information creates a powerful (and valuable) dataset, not only to them but how they can engage both brands and resellers to provide you with the most relevant things for you to buy. From the Advertising Age article above: "We have pretty advanced targeting capabilities. They fall into two buckets – one is lifestyle and one is in-market. Lifestyle is the broader part of the funnel and consists of categories like fashionista, gadget geek, mom or coffee enthusiast. Further down the funnel within categories – has this person looked at consumer electronics products? That’s the kind of audience segment information that we share," said Amazon’s global head of advertising, Lisa Utzschneider. They’re probably under-selling the power of this data or it is so rich that haven’t been able to figure out how to sell it others just yet.
The Kindle and the iPad could be free… and these companies wouldn’t even miss a beat to beat the street. Welcome to a new age in business.