Whenever you go out and purchase a printer, Xbox console, or Kindle Fire tablet, know that each of these products should be sold at a much higher price. Why? What each of them has in common is being a "loss leader." This means that the companies that produce these products subsidize their price by selling them for below the manufacturing cost in hopes that its purchase will stimulate sales of other goods that will make up the difference.
For Xbox, this is the price of games and subscriptions. For Kindles and other e-readers, it's about selling e-books. Printers -- traditional and 3-D -- make their profits from the sales of ink (or in the case of 3-D printers, raw materials).
This model has been the norm in the printing industry for decades. Companies such as Hewlett-Packard (NYS: HPQ) have exploited this model to great advantage, as the retail price of ink for their ink-jet printers can run as high as $8,000-per-gallon. However, as the world is becoming increasingly paperless Todd Bradley, who runs the printing division at HP, recently hinted that the company might be reconsidering this model.
Microsoft (NAS: MSFT) has been selling the Xbox gaming system at a loss since it first introduced the product. In 2005 when the original Xbox was released, the gaming console retailed for $399 while the manufacturing cost was $552.27. The money lost on console sales are recouped by the sales of games as well as licensing fees and software, which are all highly profitable. Recently, Microsoft introduced a new pricing system that reduced the cost of the Xbox 360 console even further while in turn creating a subscription system that requires users to pay for additional content on a monthly basis.
Tablets and e-readers
The "loss leader" model has also dealt Amazon (NAS: AMZN) a competitive advantage in the tablet sphere with their Kindle Fire. By pricing the product at $199, Amazon is able to sell the Kindle for less than half the price of their biggest competitor, Apple's iPad 2. Additionally, Amazon believes that the proliferation of their tablet will direct more business toward Amazon.com and generate further sales there.
As technological developments change the way we consume information companies like these are making it a priority to put their products in the hands of consumers and worry about profits later.
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Below we have compiled a list of companies, most of which are mentioned above, who use a pricing strategy that incurs a loss at the outset for some of their signature products.
1. 3-D Systems (NYS: DDD) : Engages in the design, development, manufacture, marketing, and servicing of 3-D printers and related products, print materials, and services. Market cap at $1.67B, most recent closing price at $32.72.
2. Hewlett-Packard: Offers various products, technologies, software, solutions, and services to individual consumers and small- and medium-sized businesses (SMBs), as well as to the government, health, and education sectors worldwide. Market cap at $44.19B, most recent closing price at $22.35.
3. Barnes & Noble (NYS: BKS) : Operates as a content, commerce, and technology company in the United States. Market cap at $957.18M, most recent closing price at $15.90.
4. Stratasys: Engages in the development, manufacture, and marketing of three dimensional (3-D) printing, rapid prototyping (RP), and direct digital manufacturing (DDM) systems primarily in North America, Europe, and the Asia Pacific. Market cap at $1.B, most recent closing price at $47.12.
5. Microsoft: Develops, licenses, and supports a range of software products and services for various computing devices worldwide. Market cap at $246.57B, most recent closing price at $29.35.
6. Amazon.com: Operates as an online retailer in North America and internationally. Market cap at $98.05B, most recent closing price at $217.64.
7. Sony: Designs, develops, manufactures, and sells electronic equipment, instruments, and devices for consumer, professional, and industrial markets worldwide. Market cap at $13.65B, most recent closing price at $13.59.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Dan Connelly does not own any of the shares mentioned above.
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