Should Barnes & Noble have Gone Big with nook?

Posted on by Rags Srinivasan
Barnes & Noble received so many pre-orders on its ebook reader nook that it cannot anymore deliver nook for Christmas. With more than a month to go before Christmas, B&N says it can only deliver after January 4th.  It makes me think if they could have done things differently for the launch:
  1. Market size: Forrester says 900,000 eBook readers will be sold just during the holidays. Amazon is the market leader with 65% and Sony the rest. nook is the new entrant, and Barnes & Noble is not saying how many units they sold.  Introduction of this new and better looking and functional device definitely would have grown the market, bringing in new customers who did not want to go with Kindle. B&N should have planned on selling 400K to 500 units during Holidays.
  2. Did they plan on under supply to create buzz? I doubt it, even though brands have previously been accused of doing it to create buzz, Barnes & Noble already had enough buzz going for it with the device and the marketing campaign.  Since they priced it as penetration pricing, shouldn’t they line up the supply chain to meet the volume?
  3. So why did they not plan on selling 400K-500K units? If we assume their margin is so low that nook cost $250 to make, for 500K units the total cost is $125 million. They have no long-term debt in their books (amazing) and could have financed this investment with debt – besides they need not take long-term debt if they could strong-arm their suppliers to delay their account payable until after B&N gets paid. (Update: B&N did take debt but did not have the power to strong arm its supplier because there is only one)
  4. The device looks definitely better than Kindle and they positioned it as such – so why follow Kindle’s price leadership? If they had priced it higher could they have not only handled the lower demand but also delivered more profit?  For instance if they had priced it at $279 with a profit per nook (i am not including book sales) of $29, even if they managed to sell only a third of current sales (which is an unlikely drop) they would make more profit than current price.
  5. Customer Margin: nook profit is about total customer lifetime value, from all those ebooks customers buy, accessories and the 2-3 year refresh cycles. So footprint helps and they do not have to make up all the profit just from the device. But it appears they did not calculate what the demand is going to be and followed Kindle’s lead (which could easily be wrong as well).

Now I waited too long to order a nook and I am not going to gift one for the Holidays.

Update: Here is an estimate of number nook readers Barnes & Noble sold in the early days.

5 thoughts on “Should Barnes & Noble have Gone Big with nook?”

  1. Hi Rags,

    I did not go into the nitty-grity of the 10K. From an accounting point of view your note makes sense. I believe there is an underlying assumption that B&N only spent the money on the reader and not on other future innovations (future will tell).
    Of course I can see many reasons not-accounting related issues that could have created a shortage, such as production ramp-up which is always critical (I used to work in electronics manufacturing). If it is right it is possible that B&N “forgot” to adjust pricing accordingly to skim the early-buyers with the limited supply first and adjust later.
    In conclusion, I do agree with you, B&N went big and sort of got it wrong. They are learning what is takes to develop and sell electonics.

    Thanks for the blog by the way, I enjoy reading and will take time to share my thoughts whenever I have time.

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  3. Pingback: Shining new Light On nook Investment and nooks sold « Iterative Path

  4. Hey Benoit,
    What you point out is the common pricing tactic of toy stores and it does work amazingly well. When a child has set its mind on the toy of the season and the parents cannot buy it due to supply limitations they first buy “lot more” other toys to reduce disappointment for the child and then buy the toy in a month or so when supply eases. This works great for channels that go for the wallet share of the customer and brands that have multiple attractive product lines and hence can keep the customer within the brand family.

    That is a tactic – what we are dealing with in eBook is the platform war that requires an integrated strategy and flawless execution.
    You also point out the missed opportunity of customers going with Kindle instead. You and I do not have the data B&N decision makers are looking at but even if they were to make this double-sale, could they have delivered higher profit just by pricing nook higher?

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  5. Hi Rags,

    Good point here, however there is an aspect of things that could play in favor of B&N, although likely unintentional.
    Studies prove that when buyers decide to buy a product for xmas, they stick to that decision even when there is a shortage in supply and buy the product afterwars. All of this because people are consistent with their decisions. It usually triggers a double sale as the buyer will get something for xmas and get the initial afterwards. For example, buyers may get a book for xmas as a quick substitute and the Nook afterwards.
    Of course that factor will not make up for the missed opportunities but it can limit the opportunity loss if the Nook really is different from competiting products.
    What do you think?
    Benoit

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