At first no one wanted to buy Jell-O. The year was 1902, the product was jiggly, and people had no idea how to serve it. Then, its producers went door-to-door with free cookbooks. And the rest of the story is history.
By contrast, from the start, King Gillette was able to sell his invention. With disposable razor blades an attractive alternative to keeping used blades sharp, he did not have to worry about “free” until his patent expired in 1921. However, more competition meant he had to get loyal razor users who would continue buying the blades. So, at a steep discount, he provided the US Army with Gillette razors and also sold them cheaply to banks for their “save and shave” campaigns.
You see where we are going. Called the “razor and blade” strategy, price your product as a loss leader and then make money on its complement(s).
And that takes us to the Kindle Fire. With its manufacturing cost higher than its selling price, Amazon is using the “razor and blade” strategy.
The Economic Lesson
For goods and services such as cookbooks and Jell-O, razors and blades, or the Kindle Fire and apps, when you increase the quantity demanded of one product through a low price, you can stimulate demand for its complement. The route to profits is just a bit indirect.
An Economic Question: Using 2 demand and supply graphs, how might you illustrate the impact of a low price for one product on its complement?