The Tablet Wars: Will Price Determine Market Dominance?

The Tablet Wars: Will Price Determine Market Dominance?

Amazon recently shocked consumers with the unveiling of a new line of tablet computers. The new line of Kindle Fires packs more features and is cheaper than Apple’s dominant iPad. Amazon dropped the price of its entry level tablet from $199 to $159 and introduced three new versions of HD Kindle’s from prices ranging from $199 to $599. This move puts a tremendous amount of pressure on Apple as its cheapest iPad starts at $499 and corresponding versions of the Kindle are $249 less than the iPad. Product cost is not the only thing Amazon is looking to slash, it also debuted a $49.99 annual data package plan that is $130 cheaper than Apples equivalent data package plan. Mr Bezos, the CEO of Amazon, highlighted it himself on the costs consumers will get by choosing a Kindle over iPad at “more than $400 in year-one savings”.

It’s obvious that Amazon is employing multiple pricing strategies to gain market share in the tablet space. It’s using penetration pricing to build volume and undercut Apples current premium pricing model. Amazon is hoping to gain large market share to acquire consumers and eventually lead them to become loyal brand advocates. Along with penetration pricing, Amazon is employing a multi-segment pricing model catering to customers who have different needs and different price sensitivities. Despite Apples high prices, it boasts 68% of the tablet share market, while Amazon maintains around 5%. This pricing strategy allows Amazon to open the tablet market to budget conscious consumers while still delivering the performance on the back end. 1 Amazon will potentially not even break even on the sale of the devices, but it’s important for the company to gain market share, and it believes it can recoup the money later through the sale of other Amazon services and products. “We want to make money when people use our devices, not just when they buy our devices”. 1

Examples of the Pricing Strategies in Other Industries

Pricing strategies are not unique to the tablet industry. Examples of the successful use of pricing strategies appear in the airline industry and in the consumer razor industry. In the fast food industry, McDonalds executed a penetration pricing strategy