I have a small ebay business and I ship over a thousand packages a year via USPS. The vast majority of the items I sell are between 2-6 lbs. Shipping per package to US locations costs me from around 5.30 to 15.00 according to weight and distance. Average per package is right about 8.00 a package. UPS and FedEx rates are similar or a little higher on average.
If I pay prime 100 I can order my ass off for food, sundries and household goods and I pay no additional shipping charges beyond the 100.
How is this possible? I know how much real world shipping costs and if Amazon wants to make like Walmart and be your grocery store and household goods store that’s dozens of shipments a year, often for items that weigh a lot more than the ones I cited above. I don’t see how that $ 100. is going to pay for all that.
The main answer to date is “Amazon’s magic logistics allow them to do that”. It’s not really a satisfactory answer. Shipping is expensive. $100 worth of shipping would be eaten up in a month or less by someone really getting into the prime ordering lifestyle. It seems like a huge money drain.
They get the very lowest tier of shipping rate, something small shippers like you and me can’t get near. They also accept a bite out of their profits for fulfilment… you can often find non-Prime items a few dollars cheaper, before shipping.
Prime customers probably buy a lot more from Amazon, thus earning Amazon the profits off the stuff that the prime customers are buying. Sure they take a hit on shipping, but the margins on the stuff probably makes up for it.
I bet the $100 is just there so that Prime customers think that they have to make it worth their while, and therefore spend a lot more than they would have on Amazon. Probably capturing business that would have gone to other online sellers, too. In short, Prime is about marketing and loyalty building, not about shipping.
And remember, without Prime you still have “Super Saver Shipping” - it was $25 until last year and then it jumped to $35. With Prime you will likely buy more than you would with Super Saver Shipping - I had more than a few times where I was struggling to come up with the last item for the $25 and said screw it and decided not to get the stuff from Amazon (decided it wasn’t worth it to get something I really didn’t super want for free shipping and it was worth paying a little more for what I really did want from the local store).
I’m pretty sure it’s a bit like insurance too. There are enough people who don’t use a hundred dollars to at least partially offset thee and me getting our money’s worth.
UPS and FedEx negotiate individual rates with their biggest customers.
I once worked for a large corporation that did a lot of shipping with FedEx Express (but nowhere near what Amazon does). I got to see what FedEx actually charged us for our department’s shipments. It was just a fraction of their published rates.
Plus you as a small shipper don’t have access to services list Smart Post and Sure Post, where a private carrier takes your package to a local post office to be delivered. And you don’t have the volume or the sorting facilities that would get you access to the USPS bulk, pre-sorted, and automation rates.
Even though the rates they pay are not comparable to those you pay, they still add up. Programs like this inspire a lot of impulse buying and customer loyalty. I have to say myself, there were a lot of times when I would see something on Amazon and say “Well maybe I’ll buy it sometime when I have enough stuff to qualify for free shipping.” And then I forget about it and never end up buying it. One of the truisms that every direct marketer knows is that if you don’t get the customer to buy NOW, there is a good chance they will never buy. That’s why (before the internet) so many mail order catalogs had 24/7 phone lines. It’s not because they get a lot of orders at 3:00 am, it’s because the 24/7 banner on each page of their catalog screams NOW! ORDER NOW! and it removes a psychological barrier to ordering and encourages impulse buying.
And there is the factor of customer loyalty. By getting your customers to send you $99, you force them to rationalize their decision. They ask themselves “Why did I just send them $99 for nothing?” and their answer can either be “I’m an idiot” or “This company is offering me a great deal!” Guess which it’s going to be? To rationalize your decision, you have to decide you love Amazon and you’ll make up some pretty convincing reasons for yourself. And then you will tell yourself “I’ve got to get my money’s worth” and go out and spend, spend, spend.
Of course, a certain number of people won’t get their money’s worth. Not a problem, Amazon’s got their non-refundable $99 up front.
Amazon isn’t really interested in making money on Prime memberships directly. They will even accept some degree of financial loss on the model if they need to. Amazon has always been about total retail domination and they are quite good at it. They are using Prime as an experiment to learn how to do retail on a fast turn-around door-to-door model that may or may not eventually include drone aircraft deliveries. Amazon started out as an online bookstore but that was really just a front. Jeff Bezos himself admits he never cared much about books per se. That was just the first existing business model that he could break easily. The legacy model wasn’t strong and the product was easily shippable and non-perishable. He wants most of the others now. Look for Amazon to be the target of an anti-trust lawsuit in 10 - 15 years because they are wiping out way too many retail industries with their ever-growing efficiency.
Amazon does get much lower shipping rates than you or I could personally. Fed-Ex and UPS don’t have set rates that apply to everyone. The contracts are negotiable and things get much cheaper really quickly when you start shipping out whole trucks full of product times a day. Cutting edge supply chains are remarkably inexpensive and efficient when the companies have integrated systems.
Not everyone takes advantage of their Prime membership the way that you do. Many people just buy it and use it for a few things and forget about it because the money doesn’t mean much to them Roughly $8 a month still doesn’t take much when you get (substandard) movies bundled with it plus free shipping on demand. It is the same thing I asked a AAA driver when I needed 4 very expensive tows in a year for a total of about 300 miles and a cost of less than $50. I asked him how the made any money. He said that most people that have it don’t ever use it so it all balances out.
It’s actually the other way around; Amazon offers what are often substantial discounts on the price you would pay in a brick & mortar store, and then free or highly discounted shipping on top of that. How do they make a profit despite all of the price hits compared to buying something at Barnes & Noble or Target? They make it by volume, and the fact that they don’t have to maintain a large physical inventory. In fact, Amazon has pretty much optimized the “just in time” mantra by forcing the inventory costs down to their suppliers and warehousers. Amazon is the epitome of the middleman; making money through what is almost a zero overhead passthrough, so that almost their entire vig–minus the costs of maintaining server farms and developing new web-based tools–is profit. Prime is, as you note, just a way of encouraging more sales which offsets their almost trivial shipping costs, but those costs are already built into the prices.
Ever since I got Prime, I’ve probably doubled or tripled the number of orders I place through Amazon every year. So guess it’s working, in my case anyway.
Plus, I take advantage of the other benefits: borrowing a book for my Kindle every month instead of buying it. I haven’t explored the free streaming video titles fully, but I watcher Headhunters (based on a Jo Nesbo novel) the other night and it was pretty good.
I mean, I don’t disagree with your post, but it’s not really “the other way around”, is it? “Sure we take a loss on each product, but we make it up with volume!”
Incidentally, USians may not know this, but Amazon has free international shipping for orders above $125 (no prime needed). I’ve taken advantage of this quite a few times, and believe me free international shipping is a huge deal for me.
I think they’re taking a bit of a hit on the shipping in order to grow. They’re putting in more and more warehouses which allows them to not have to send things out via 2 day UPS. For example, they just put in a warehouse near me. Anything that comes from that warehouse goes out via ground instead of 2 day. That saves them a ton of money. They’re probably also hoping for the Walmart effect. That is, people start relying on them for their everyday needs and local places will go out of business. Yes, there are many many items that they sell at a huge discount, but OTOH, the $6.00 item I picked up is probably (I assume) about the same price if I went to the store and got it but…why go out of my way. Free shipping, I wasn’t in a hurry, and I didn’t have to run to another store after work.
As people get into those habits they can raise the Prime rates even more (or just the cost of the items themselves) and since they’ll have so many warehouses more of the money from prime will be profit instead of actually being used to defer the shipping costs.
Astro: I would challenge or anyone else here to keep track of your individual expenditures for this type of stuff for a certain period of time and compare each item with Amazon prices.
I think you will find a quite large number of these items you actually buy are $1, $2, $3 and these items either aren’t available on Amazon or the prices hugely jacked up.
“Sure we take a loss on each product, but we make it up with volume!”
