Spacely Sprockets buys sprockets at about $9.50 and sells them at $10.
Cogswell Cogs makes cogs from scratch for $5 and sells them at $10.
If these companies are "the same size" meaning they generate roughly the same profit, then SS is selling 10x the volume of CC. If they can both cut costs by 10%, then SS's profit almost triples, while CC's only increases by 20%.
This cuts the other way too -- if you are operating at thin margins, a small change can push you into unprofitable. If you have fat margins, your profits just decline.
Can anyone give an argument for why the cost to reduce costs by 1% should be a function of profits rather than of revenue or assets?
Then there's other things like Prime play which may justify them going after low margins in the tablet industry, but there's other good android tablets in that price range.
I think what you're thinking about w/ prime and tablets is their general approach with complimentary products.
For example they're developing original content. This isn't just to profit off content, it's also from the realization that physical books and movies are becoming less imporant and that digital copies are becoming more and more prevalent. This lowers the cost of the goods & reduces the amount Amazon earns by charging a % of the sales. So it makes sense for Amazon to just outright own and distrubute the content too.
But this also compliments other Amazon businesses. If people are watching TV through Amazon then Amazon has more opportunities to advertise their products to individuals. I doubt Amazon plans on loosing money on original content, so it's not a loss leader, but the fact that it boosts the value of their tablets, prime service (which significantly increases the amount people spend at Amazon per year), advertising etc. means that they are willing to accept much lower margins on content production than traditional studios and perhaps even Netflix.
For example, Microsoft (software) is a high-margin business. Their cost of raw materials is low, so 77% of revenues goes to pay for R&D, other expenses, and then profit.
Apple is a lower, but still a high-margin business with healthy 37% of revenues remaining after paying for the cost of materials and assembly. Apple can charge significantly more for their devices than they pay in raw material costs. But it may change, so Apple investors are generally watching its gross margins. For example, last year Apple's margin was 47%, i.e. it declined quite a bit since then.
Amazon (as any retailer) is a low-margin business. They move a lot of products, but 89% of the revenue goes to pay for those product. So only 11% of the total revenue is available for R&D costs and profit.
A pity the blueprint system being plugged is ipad / idevice centric. "Google Glass, show me blueprint 84Q..."
However, it's very rare for there to be fundamental, physical limits to the internal cost of doing business. Which means that if you can do that better (through manufacturing improvements, supply-chain improvements, what-have-you) then you can undercut your competition only slightly while reaping significant profits.
And, because your competition is running on such low margins they can't easily compete with you. So, from a pure price perspective, you either get to retain your higher profit margin while being price competitive or you simply eat the majority of the market before it has a chance to settle to a lower price-point, which is win-win.
It does, however, mean that you need to put in a lot of hard work.
No, it usually means it's a commodity business. Innovation can be a defensible competitive advantage. As mentioned in the article, because of operating leverage, a fairly small innovation can yield significant profit growth.