About 5 million of Amazon's 121 million customers subscribe to Amazon Prime, a $79-a-year service that covers "free two-day shipping" (we repeat, $79 covers free shipping...). If you thought that pricing move was brilliant, now consider this: Amazon is adding the ability to borrow one book for free a month if you subscribe to Prime, provided you also own or buy a Kindle. That's right: Amazon is giving away its core products for free.
Is Amazon crazy? Of course not. This move will only accelerate its 58% annual growth rate.
1. Amazon has been pushing Kindles for years, but suddenly faced huge competition from Apple's sexier iPad. Amazon just caught up with the Kindle Fire, just as colorfully sexy with a kinder price point of $199. But Amazon needs to ramp its push into the tablet market, since today's mobile hardware leads to Amazon vs. Apple sales ecosystems.
2. People who buy Kindles are avid book readers -- and likely to want more books than one free rental a month. So the giveway is unlikely to cannibalize many sales. If anything, luring readers back to the Amazon.com portal each month could increase sales as these avid readers traipse through the Amazon candy store.
3. People who buy Amazon Prime only recoup the $79 annual fee if they order a lot of merchandise -- perhaps two orders a month. Given an average order size of $25 (guess), Amazon is locking in $600 a year in orders plus $79 in service fees if it convinces you to spring for "free shipping." And if you don't buy anything, you pay $79 for nothing for a tidy Amazon profit margin of 100%.
4. $679 a year per customer is a pretty sweet deal for Amazon; so no wonder Amazon gives away a $5 book value and some free movies as well for anyone who signs up for Prime and also buys a Kindle.
Amazon is simply rewarding its best, most-valuable customers with an offer that will get them to accelerate their spending, lock them in further with Kindle hardware, and sustain future profits all while fighting off the iPad.
It's brilliant. And it's "free."
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