From Knowledge@Wharton: Amazon.com will lose money on each $199 Kindle Fire it sells, but hopes to make back that money and more on tablet users who are expected to spend more than other customers. Sprint is not expected to turn a profit selling Apple’s iPhone for at least three years, but expects that gamble to pay off in happier users who will bring in more subscribers.
The principle underlying these moves is customer lifetime value (CLV), a marketing formula based on the idea of spending money up front, and sacrificing initial profits, to gain customers whose loyalty and increased business will reap rewards over the long term. It is a model that is becoming more and more popular among technology companies, including Amazon, Sprint, Netflix and Verizon. And as software companies increasingly turn to subscription-based business models through cloud computing, CLV will become an even larger issue, according to Wharton experts.