Monday, November 26, 2007

Amazon Kindle Magnifies the The Long Tail

One of the reasons that Chris Anderson suggests for Amazon's success was that it's online sales model tapped into the long tail of book demand because it separated the limitations of shelf space from inventory and reduced transaction costs (i.e. sales processes).

In a retail setting floor space is expensive and inventory is inherently limited because shoppers will only buy books that are on display. Furthermore, a customer has to physically walk into a store to make a purchase and up-selling opportunities are narrowly limited to shelf takers and employee recommendations, which touch relatively few customers.

In contrast, Amazon.com has nearly infinite shelf space and dramatically lower cost of inventory because their books are stored in warehouses rather than expensive retail locations. The transaction costs of browsing the web are also much lower than getting up off the couch to walk into a store. Lastly, up-selling mechanisms touch many customers through surprisingly popular recommendation algorithms.

Yet, Kindle takes this to an even further extreme by removing physical media from the process, which virtually eliminates all inventory storage costs and dramatically reduces transaction costs associated with delivery & wait times, which then increases power of impulse buying and the effectiveness of up-selling.


Book Store Amazon.com
Kindle
Cost of Inventory Printing + Retail Printing + Warehouse Electronic
Cost of Transaction
In Person Web + Shipping
Web

Given this perspective, I think Amazon is making a mistake by keeping the price of Kindle high and the format proprietary. An inexpensive and open electronic book reader would reach an wider audience and unlock more of the long tail, which Amazon is positioned to be the primary beneficiary of. Others, like Jason Epstein, offer some insight into why the costs of Kindle might be so high, but I always contend that pricing should be based on value, not cost and I suspect that his cost assumptions might a little bit high.

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