Making Money While Keeping Prices Low: Amazon CEO Jeff Bezos Explains It All (Mostly)

From AllThingsD:

So, how does Amazon do it?

How does it keep prices low, while still offering some of the latest hardware? Not to mention, how does it give away an ever-expanding catalog of movies and books for $79 a year in addition to free two-day shipping?

In an interview with AllThingsD, Amazon’s founder and CEO Jeff Bezos provided some insight into the company’s economics.

During the conversation, the jovial leader laughed often (even when I suggested he lacked focus for selling everything from jeans to hardware). He was also quick to point out that while Amazon’s approach to making money may be different from others, he doesn’t necessarily believe others are doing it wrong — rather, they’ve just discovered what works best for them.
Here’s most of the 20-minute interview:

What stood out to me from the presentation today was your comments on Amazon’s ability to make money despite offering low prices.
Jeff Bezos: We do not like the razor and razor blade model, where you lose money up front and then somehow make it up on the backend. We also do not like the other model, where you make a lot of money on the device, because it doesn’t follow our approach.
By the way, one thing I should tell you is that our approach is our approach, and we don’t even claim it’s the right approach. It’s not something that’s new, but it’s something we’ve done since the founding of the company. In my view, you set up the business in a way that is aligned with the customer, or you can set it up in odds with the customer. When you have the option, you should figure out a way to be in alignment. Sometimes that requires you to be more patient, so it’s part and parcel with long-term thinking.
But if you were a short-term-oriented share owner, you might say let’s get the money up front. That’s where I decline to say that approach is wrong. I won’t say that. But it’s not ours. I work with the teams to set up the business models.

How long-term are you thinking for the Kindle?
Bezos: This one is pretty straightforward. We don’t want to lose a lot of money on the device.

Are you losing any money?
Bezos: We don’t disclose the exact bill and materials, so I can’t answer that. But we don’t want to lose a lot of money on the device because then we’d really hate it if you put it in the desk drawer. On the other hand, if you make a lot of money on the device, I believe you haven’t earned your money on it yet, and then you’ve incentivized them (the customers) to stay on the upgrade treadmill that I mentioned today.

In a previous interview, you said it takes five to seven years for a new business to either break even or become profitable. And you are now in year five of the Kindle.
Bezos: True story. Typically, of course, they vary a bit. We are in year five, but actually you could say we are in year eight because we worked on the device — the Kindle one — three years before we launched it.

Then, that must mean you are making money?
Bezos: Again, we don’t disclose that, but you’re good — you’re really good [at asking questions]!!

You also have a non-traditional content model. It’s hard to break down Amazon Prime to see how that works when content is included along with two-day shipping.
Bezos: If you talk about the original genesis of prime seven years ago, it’s a shipping program and you get free two-day shipping on a million items. Today, it’s 15 million items. But Prime was designed to be about wanting faster delivery and not wanting to pay for it. … So, if you change something to an all-you-can-eat buffet, then you don’t feel guilty. That’s the genesis.

Continue reading the rest of the story on AllThingsD