Unless you are a monopoly, one of your competitors will drop their prices since they too will be looking for improvements. As Bezos says "your margin is my opportunity".
If you reduce usefulness of your product (your store) to the point where people can't get what they want and don't use it, it doesn't matter how much margin you have.
In theory, yes, but if you have a profitable business with a 1% margin by definition it already has to be absolutely giant (e.g. Amazon) to be making money. And to reduce costs at this scale is harder than increasing sales.
Running low margins in retail is often more of a really cutthroat business strategy, rather than simply trying to be nice to customers. You can easily run smaller competitors out of business, and increase your volume and overall profits, by making the competition unable to compete.
There are industries where 1.4% margins are acceptable(for example, supermarkets) and they might even be acceptable for computer parts, problem is that Amazon has ~5% margins.
It's not really about the cut they take, but more about the fact that they take over the sales channel, and from there take a bigger cut and eventually drive your margins to zero.
You can reduce your margin, but you can't really reduce the wholesale price. If the big labels expect to take $0.70 from you and your target audience is not willing to pay a dollar but rather something like $0.50, then you can only make negative profit.
Can you really blame them? We in the tech industry are used to fat margins. Retail margins are thinner than the new iPad. If you were running a business like that, wouldn't you love to get an extra 2 - 5% of your revenue back, and exert considerable effort to do so?
If you spend 75 cents to earn a dollar on one customer and can spend 25 cents to earn a dollar on another customer, you'd be dumb not to take customer 2.
That's exactly what I was suggesting: If you are stuck in a low margin business and see that a provider such as google is screwing up your margins, you should really try to work on another idea which has higher margins.
Working on a low margin business is a choice! You can always ditch it and try to find something with higher margins (= higher value created for users).
If the margins are high enough, then it's optimal to overproduce and then sell to everyone who will buy at a certain price point. If discounts will reduce your ability to sell the same brand in the future at that price point, it can be financially optimal to destroy it instead.
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