In 2007 Amazon created a market for e-readers by introducing the Kindle. It was just one device – 6 inch display, 250 MB of internal memory and could hold approximately 200 non-illustrated titles. Fast forward 4 years and Amazon offers 7 different versions of the Kindle – from the 6 inch Wi-Fi version to the 10 inch Kindle DX, to the brand new color Kindle Fire tablet. Why does Amazon have this multi version product and pricing strategy?
Versioning is offering a series of marginally different products built off of one core product. And this is good for a couple of reasons. First, it allows you to meet unique customer needs with your products. Offering multiple levels of products, generally correlated with multiple levels of profit margins, gives customers a choice to select the version that best fits their needs and allows a company to profit capture profits from it.
More importantly, versioning also gives Amazon the flexibility to pursue multiple pricing strategies. Amazon has wisely incorporated both a skimming strategy and a penetration strategy for its Kindle line of products. And it has done so in phases. Initially it was all about skimming – the $400 original Kindle, the $350 Kindle 2 were priced very high relative to competition. Over the last couple of years, competition has heated up in this space and Amazon started seeing a lot more low-priced competition. Amazon responded by introducing Kindles with low value features at a much more competitive price point to protect their high-end Kindles. The price of the 6 inch keyboard Kindle dropped to $139 and they also introduced an ad-supported kindle for a mere $99. A month ago, Amazon announced a $79 with no 3G capability, another $99 Kindle but without a keyboard and a Kindle tablet for $199.
Amazon took a different approach to pricing their way into the tablet market. Apple is the incumbent market leader and there are a bunch of Android tablets trying to eat into Apple market share. The market is in a phenomenal growth phase and ideal for a cost leader to use penetration strategy. Amazon did just that – the Kindle Fire is only 40% of the price of the cheapest iPad. This predatory pricing should act as a barrier to entry for new competitors without the cost position of Amazon. Kindle is the only access point customers have for content on the Amazon platform and content is Amazon’s high margin profit driver. The more people who own the Kindle, the more chances Amazon will have to sell them content.
If one price is good, two are definitely better. But companies should be careful to fence off the high and low value products to avoid cannibalization of the high-end products. In this case it’s the non-availability of 3G data, or a keyboard. Fences need to prevent customers from obtaining high value products for unjustified, low prices and also should be easily understood by consumers. Another advantage of presenting buyers with higher priced versions is related to behavioral economics. The existence of the high-priced version will increase the willingness to pay for the cheaper versions. Product developers should design product versions in such a way that it allows customers to make trade-offs between the features they want and the price they are willing to pay. Versioning is second degree price discrimination