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Kindle Sells Like Hotcakes: Wait, Huge Sales Volume at a Loss isn’t a Good Thing?
December 30th, 2011
Amazon really racked up some big sales of the Kindle line of eReaders during the month of December. Amazon boasted that they moved a million Kindles each week during the month. You can bet that a bunch of them were the new $199 Fire tablets too. Selling a ton of your latest and greatest product is a great thing, assuming you are making a profit.
Each of the Kindle Fire tablets is sold at an estimated $3 loss. This is just one reason why some analysts are not smiling when they look at the end of Q4 for Amazon. In fact, one Goldman Sachs analyst is saying even with the brisk Kindle sales, Amazon won’t hit its revenue estimate for the quarter. And with each one eating into the bottom line, market fears are enough that Amazon’s stock price is seeing some volatility.
Amazon stock dropped 4% yesterday before recovering most of that loss by the close of the trading day. Overall sales for the quarter are still expected to have grown 38% over 2010, which is still pretty impressive. Amazon hopes that taking a loss on the tablet will spur sales of digital content to make up the hardware losses, which isn’t an uncommon business model for gadgets. Hopefully, this strategy will pay off in 2012 and beyond.
[via AllThingsD]
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Apparently the so-called “analysts” have never been to a Business 101 class. This is what is called a “Loss Leader”. A perfect example is when companies like Burger King promote their Double Cheeseburger at $1.00 for a substantial loss. The expectation is that virtually no one will come in just for the burger. They will add on a soda and fries which are sold at super inflated prices. The same thing is done when retailers advertise milk at $.40 below cost in the expectation that a person on the street will buy more than just milk. This loss leader principle is obviously in play in the expectation on Amazon’s part that a purchaser who buys an ELECTRONICALLY transmitted book in DIGITAL format with virtually no overhead whether brick&mortat, storage space (even the small space a single book takes up on the shelf is worth $$$), or manpower to retrieve, pack and ship, they will quickly recouperate their costs. Any analyst who “fears” this undervaluation is ignorant of the behaviors of the consumer and a complete moron.