Amazon’s Gaga Loss Leader Losses

Fans and music industry observers were taken aback last week by Amazon.com’s offering of the new Lady Gaga album for a mere 99¢. On Monday (5/23), the stultifying crowd of traffic severely compromised the Amazon servers. So to prove it could, “ramp up” to meet any demand, the online retail giant offered the mega-sale again on Thursday. According to various reports including Billboard.biz and Inquisitr.com, Amazon sold approximately 440,000 Gaga units mostly all of which were at the sale priced price point.

According to Billboard, Amazon’s losses from the industry-rattling sale totaled about $3.2 million. For inquisitive readers, the math is spelled out below, but as important as the losses incurred are the benefits. Did Amazon benefit?

Unlike the popular economics joke—lose a little on each sale and make it up in volume—perhaps there were some pluses to be added to the Amazon ledger. The idea of a “loss leader” is nothing new for retailers. Increased traffic often means additional purchases besides the sale item. Also Amazon has its new Cloud Player service to promote. Buying a digital album increased the free storage substantially, so the Gaga consumers were also lured to become part of  the Music Beta. With added cloud competition arriving already from Google and expected to arrive soon from Apple, Amazon leaders may have felt this loss was a fair exchange for customer acquisition and awareness of its new service. And speaking of Apple, Amazon would like nothing more than to steal a few large bites from the Cupertino company’s iTunes market share.

The Math (unofficial): Interscope/Universal collects $8.39 per unit from retailers. Amazon sold the product for 99¢, leaving a loss of $7.40 per unit. Sales of 440,000 X $7.40 per unit equals a loss of $3.256 million. This number can be trimmed a bit to account for full price units and deluxe version sales. Billboard projects the album will sell overall, 1.15 million units. (iTunes reportedly shifted an estimated 200k units at full price.)