Amazon's move to drop the price of its Fire Phone to 99 cents with a two year contract tells you all you need to know about how the device is selling, the company's business model and how it'll screw early adopters.
On Monday, Amazon dropped the price of the Fire Phone ahead of Apple's iPhone 6 launch. Now we all know that smartphones prices fall quickly. That $199 phone you buy today is likely to be $99 in a quarter when the latest greatest device comes along. Samsung's Galaxy S5 has promotional deals at most carriers.
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But Amazon's Fire Phone may have just set a new benchmark for price depreciation. It took 46 days for Amazon to basically make the device free. Amazon knows its price elasticity curves well. Here's what Amazon's move tells us:
- The Fire Phone didn't sell well. Some observers would say the device wasn't enough to break consumer inertia. Others would say that exclusivity on AT&T is a drag. The truth probably revolves around a little of both.
- Amazon can basically give the Fire Phone away and still make some money back on the sales of content and future purchases. A subscription to Amazon Prime is included with Fire and the e-commerce giant surely has figured out the lifetime value of a subscriber.
- The company has the promotional engine to push a 99 cent phone and potentially rid itself of inventory. Nevertheless, Amazon is likely to take an inventory writedown of some sort.
- But more importantly Amazon's 99 cent Fire sale means that it has sacrificed early adopters and some of its most valuable Prime customers. Those who bought a Fire phone are likely to be Amazon's biggest supporters. If you're in Amazon's ecosystem, the Fire Phone looks like a decent option. By cutting prices so quickly and dramatically Amazon burned some goodwill among early adopters. How would you feel if you bought a phone 46 days ago for $199 only to see it discounted to less than $1?
Amazon should throw its early Fire Phone adopters a bone via a $198 gift card to head off what's likely to be a small, but vocal group of customers. Add it up and Amazon CEO Jeff Bezos may even want to whip up an apology note.
After all, former Apple CEO Steve Jobs apologized to early buyers of the iPhone after the company delivered a $200 price cut — from $599 to $399 — just weeks after a launch.