Amazon Makes Prime Cheaper

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There are a lot of articles out there this week about Amazon raising the minimum purchase for free shipping. This is not a price increase, so much as a price cut for Amazon Prime.

Consider that Amazon Prime makes up a lot of Amazon’s revenue these days. It’s similar to the model that Costco uses where the markup on goods is only high enough to cover the overhead. The profit comes from the annual membership fee that members pay. On the surface, this seems like a terrible way to do business, but on the other hand, it’s an almost guaranteed revenue stream because once people like Costco, they stick around. Plus, if your whole business model is based on being cheaper, you have to be really careful how much you mark things up in the first place.

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Amazon, doesn’t do exactly the same thing, it has a lot of other revenue streams as well, but it does get a lot of its revenue from the annual membership Prime members pay. However, there may be a flattening off of growth in those memberships coming.

For years, the value proposition of Amazon Prime was free two-day shipping. This hasn’t been a money saver for most people, so much as a way to get faster goods. I know I used to sign up for the free 30-day trial around Thanksgiving each year so that I could order Christmas presents with two-day shipping. The rest of the year, there are two kinds of things I buy. Things I need now (2-day doesn’t help with that) and things I can get later (2-day isn’t much different than 5-day in that case.)

Once Amazon sort of maxed out the number of people who were willing to pay for free fast shipping, it started adding other services to make Prime more attractive. There are free movies now and a free music service as well. These both act as price cuts.

If you think of Amazon Prime as $99 per year for fast shipping, that is one thing. If you think of Amazon Prime as $99 per year and you can cancel your $9.99 a month music service subscription, and your $12.99 a month Netflix subscription, well that practically pays for itself. In fact, when we experimented with cutting the cord last year (and then gave up later), that was exactly what got us to buy Amazon Prime. We figured we needed some sort of movie service, and that one came free with extra shipping.

But, now, Amazon Prime is probably topped out again. At this point there are those who think it’s worth $99 per year for fast shipping, movies, and music, and those who don’t.

Instead of adding more services, Amazon just made it harder to get free shipping. Now, to get free shipping, you either need to order $25 worth of books, or $49 worth of other stuff. At this point, the math changes. If you order a lot of stuff from Amazon, and you get tired of waiting to bundle stuff up to get over the $49 free shipping mark, that makes $99 per year worthwhile to a whole other group of customers.

I won’t be surprised to see higher Amazon Prime numbers from the next quarterly earnings report for the company.

All in all, a solid move for a company finally moving from growth only to growth with profits.

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