Amazon’s product strategists shocked some constituencies with their $199 price point for the Amazon Kindle Fire tablet announced today. But there’s a fundamental product strategy lesson to this pricing, and it’s an old product strategy model: The so-called Razor-Razorblade Pricing model.
We all know this model well, as consumers: your initial purchase of razor is relatively cheap, but the cost of replacement razorblades really adds up over time. If you don’t buy razors, perhaps you’re familiar with this scenario from your inkjet printer. Remember how cheap that scanner/printer was -- but have you ever seen the price of refill inkjet cartridges?
The Razor-Razorblade model works when “dependent goods” – the refills, the stuff you need to keep buying to use the product – are closely related to the anchor product. In the case of the Amazon Fire Tablet, the dependent goods are content and services – MP3s, streaming videos, and of course books, magazines, newspapers, etc. and cloud services that allow you to store and synchronize your content across devices. Amazon’s product strategists can afford to charge a low entry price to raise adoption of the device, and then (they hope) deliver an experience that’s attractive enough for Kindle Fire owners to pay for as a service.
Hence Amazon CEO Jeff Bezos’ portrayal of the Kindle Fire product strategy: “What we are doing is offering premium products at non- premium prices,” Bezos says. Other tablet contenders “have not been competitive on price” and “have just sold a piece of hardware. We don’t think of the Kindle Fire as a tablet. We think of it as a service.”