I will pay $5 for just about anything, mostly because the five dollar bill is bucking mightily these days to replace the one dollar bill as the lowest acceptable form of paper currency. If an item costs $20, I might hesitate for a second to consider why I’m making the purchase, but buy it anyway. When something costs $50, I think about shopping around to see if I can get it for $40, but rarely follow through. $99 is my mental limit for impulse purchases—for things that are more convenience than necessity, more form than function. Which is why Amazon needs to drop the price of its Kindle to $99.
I guess Jeff Bezos thinks he is meeting me and the millions of others like me who have a mental block when it comes to impulse purchases halfway with the recent price drop on the Kindle from $259 to $189. No one seems to know how many people own a Kindle, but it would be safe to say that there are probably less than 10 million people who own one, which is next to nothing if you compare it to the number of cellphones in use around the world. Since I already own a desktop computer, a laptop, and a cellphone, and I can download Kindle For PC software free, I am hard pressed to justify getting another device that I have to keep up with, especially if it costs several hundred dollars.
Which puts the product that Amazon is betting the farm on at a severe disadvantage to its number one competitor, which is the pair of eyeballs that come as standard equipment for most human beings. I don’t know if its business strategy to drop the price of the ebooks it sold below cost and price its electronic reader at a premium makes sense long term. Getting more Kindles into the hands of more readers while preserving the price of the ebook offerings at a sustainable level should have been the goal.
Skim pricing attempts to "skim the cream" off the top of the market by setting a high price and selling to those customers who are less price sensitive. Skimming is a strategy used to pursue the objective of profit margin maximization.
Skimming is most appropriate when:
- Demand is expected to be relatively inelastic; that is, the customers are not highly price sensitive.
- Large cost savings are not expected at high volumes, or it is difficult to predict the cost savings that would be achieved at high volume.
- The company does not have the resources to finance the large capital expenditures necessary for high volume production with initially low profit margins.
Pricing Strategy, NetMBA
Amazon probably couldn’t have afforded to pursue a penetration pricing strategy long term, especially since they have no idea how long it will take to make electronic book readers ubiquitous. But this $99 threshold is pretty powerful. I never even considered owning an IPhone until recently, when—you guessed it, Wal-Mart started offering the discontinued model for $99.
Show me a $99 Kindle, Mr. Bezos, and you'll get me and a few million more customers to reach for our wallets.