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.
Some critics of the $114 price point (as well as proponents of the $99 price point) suggest Amazon won’t sell many additional devices because it simply isn’t a steep enough cut. These same individuals surely failed economics for if not, they would recall that demand is downward sloping – as the price drops, units demanded increases. Demand for technology tends to be pretty elastic so even a small increase will increase unit sales. I would also call an 18 percent price cut material.
It is worth nothing that Siegler’s comment, “you have to think they simply could not make a further $15 price cut work” is also consistent with some research suggesting fractional or odd prices (ie $114) causes consumers to think a given device is marked at the lowest price possible so in this Amazon might have been successful. “Odd price” or psychological pricing suggests consumers don’t behave completely rational (in the economic sense) and therefore certain prices influence demand.
Siegler writes, “Even though the $15 price difference may not seem like much on paper, the psychological importance of losing that third digit cannot be downplayed” which is consistent with research on psychological pricing. It is also possible when (not if) Amazon begins selling the Kindle for $99 it could have a significant effect on sales. Some research suggests consumers archor decisions on the left-most digit (The left-digit anchoring effect). More, a $99 price point will now fall inside search results where the upper bound is set at $100.
We can’t underestimate the real effects of odd pricing. Sure, Amazon would sell more Kindles at $99, but the price cut to $114 is a real and significant price cut (presuming the advertising isn’t seen as a significant decline in consumer value and hence an equally off-setting price increase). Expect Amazon to move a sizable number of units even above some magical $99 threshhold.
