Last week I provided an estimate of the implied revenue Amazon expects to earn in advertising from the newly discounted Kindle with Special Offers. I happened to catch MG Siegler’s post on TechCrunch on the same topic. Siegler takes an approach I heard frequently immediately following the announcement, namely that $25 isn’t a strong enough discount. Amazon should have been more aggressive and marked the device down to $99 – then we’d be talkin’.
I agree with Siegler that this is part of a broader pricing experiment for Amazon. Amazon loves to experiment with pricing (among other things) and by so doing they can more accurately estimate demand elasticity (among other things). Thus, the recent price cut could have simply been an info gathering exercise. On the other hand, Amazon has on several previous occasions cut the Kindle price so I imagine they have a good handle on the shape of the demand curve as well as demand for ebooks (additional books sold) as a result of additional devices moving into circulation. As I wrote, Amazon could have arbitrarily picked $25 – it is after-all a very round number. In this spirit, I don’t agree with Siegler where he suggests Amazon “must have looked over the potential numbers from advertising and determined that $114 was as low as they could go.” They could have gone lower, but opted not to. And I don’t think that decision was heavily influenced by per unit revenue loss rates.