Pricing Amazon Web Services – The 200 words project

Here’s this week’s 200 word idea from The Everything Store by Brad Stone.

Amazon Web Services (AWS) allows entrepreneurs to plug into Amazons Servers and use it’s computing infrastructure. The AWS team wanted to price it with a traditional monthly/yearly rental system.

 But, CEO Jeff Bezos shifted the focus completely –

1. He decided to create an electric grid model where you pay 10c/hour of use. This was ridiculously cheap but he knew companies like Microsoft and Google wouldn’t want to play this game as it would constrict their generally high profit margins

2. He thus played to Amazon’s greatest strength – building large scale low margin businesses that attracted customers. He actively avoided what he considered Steve Jobs’ biggest mistake – making the iPhone so fantastically profitable that it attracted so much competition that ended up eating its market share. He believed high margins attracted competition while low margins attracted customers.

 When moving into a new territory/project, let’s channel Bezos and remember to play to our strengths.

 PS: The graph below illustrates this beautifully. Despite increasing revenues, Amazon.com has almost never made a profit – intentionally.

(If you look very closely, you can see that in 2010 the company accidentally made a profit. )
Source and thanks to: Benedict Evans’ blog

 ‘One thing is easy to agree on, though: competing directly with a company like this is very hard. ‘ | Benedict Evans on Amazon’s profit graph

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