Amazon Prime: The inevitable next step when shipping is just a business component

Visited the Amazon home page recently? Today the company is announcing their new Amazon Prime program, a prepaid shipping program that offers the following two ostensibly compelling features:

  • Free Two-Day Shipping on over a million in-stock items
  • Overnight Shipping for only $3.99 per item�order as late as 6:30 PM ET

This is a beautiful example of what a company can do when they’ve componentized their business to a degree where shipping stops being a cost center and becomes instead a competitive differentiator.

Since Amazon already offers free second day shipping for all orders over $25, the main value of this change is that you, the customer, don’t have a minimum requirement if you opt to pay the $79 annual fee of Amazon Prime. If you’re an eager buyer, $3.99 per item overnight is probably a good deal too, but buy two CDs, a DVD and a book, and your overnight fee is $15.96, probably not much different from the current price.

What I find fascinating about this experiment from Amazon is that they’re leveraging what us MBA types call the future value of money. Let’s face it, if you join Amazon Prime, you’re going to make sure that you get maximal value by buying all your books, CDs, DVDs, and other goods through them. But further, recognize that in 12 months that $79 will actually be worth more to Amazon because it accrues value over time. That’s the FVM magic: $79 today is worth more in the future to whomever holds it.

But let’s do a quick calculation anyway, because the $79 is an interesting figure and I’m curious how they arrived at it. Let’s say that you order something from Amazon roughly every three weeks each year. Half the time it’s more than $25 and you get free shipping. Joining Amazon Prime, then, gains you a break on shipping for every other order, or approximately nine orders each year. Divide it out and you’re looking at prepaying shipping at $8.78 per order. That suddenly doesn’t seem like such a fabulous deal, does it? For $8.78 maybe you can just slip a second item into your orders and break the $25 limit instead? Or just order every four weeks and make sure you always qualify for free shipping.

So my take: Amazon Prime isn’t a good deal for any but the most rabid and devoted consumers, the buying addicts that just love Amazon and have boxes arriving every day.

Amazon gets it, though. By allowing customers to pre-pay for shipping, they’re just opening up their bank account and saying “let it all flow in, baby.” Smart.

26 comments on “Amazon Prime: The inevitable next step when shipping is just a business component

  1. Actually Amazon doesn’t offer free 2 day shipping for orders over $25, just their super saver which as anyone who knows that has items shipped via super saver… is very s-l-o-w.

  2. I actually think the Amazon Prime is a great deal. It doesn’t look good to you because you have your facts wrong. If you order more then $25, you get “Super Saver Shipping” for free means it can take 10-14 days to get your item. Per Amazon “Select Super Saver Shipping as your shipping speed. Please note that your order will take an additional 3 to 5 days to ship.” Although it is free, by the time Super Saver Shipping arrives, I wish I had just paid the regular shipping. PLUS, most of my orders are around $20 and I hate having to come up with something to buy just to make it $25 to get the free, incredibly slow shipping. So, with the facts wrong, as you have them, it may not seem like a good deal. BUT, when dealing with the truth, it is indeed a GREAT deal.

  3. Bergen, as I said earlier, the information that Amazon has on its site says “free shipping: 10-14 days” but I have never experienced even half that wait, and have also found myself upgraded to second-day shipping many times without a fee. Further, if your orders are typically $20, you’re atypical: According to a report from Bank of America securities analyst Aram Rubinson, the average order at Amazon is $54.
    And, finally, of course Amazon is going to present the standard “super saver shipping” as being slow and tedious because they make a margin on shipping costs through their partners.

  4. I joined Amazon Prime because, this year, I’ll be ordering a great many books as research for a book I’m writing. So far it’s been a spotty experience. One of my packagaes came via FedEx; a couple came via UPS, and two came via USPS. One that I ordered well over a week ago – and the product was “in stock” – still hasn’t arrived, so the “two day” promise is not hard and fast.

  5. In your column, Dave, you say the main benefit to Amazon Prime is that there is no longer a minimum order amount to qualifty for free shipping. In your calculation, you assume an Amazon customer qualifies for free shipping on about half his orders. But then in your comments you chide someone for typically having orders of less than $25. If the typical order is $54 as you suggest, shouldn’t you revise your example?
    If we assume that the typical order is over $25 (indeed is $54) and qualifies for free shipping and assume that those who opt for free shipping receive their orders in a few days or are upgraded to 2-day shipping (which you insist is the case), then the benefit to Amazon is not FVM on pre-paid shipping–the value to Amazon is free money!
    By the way, I stumbled on this site looking for an explanation of why Amazon free shipping is so slow. My experience thus far with Amazon has been just like Bergen’s: I’m always trying to add one more item to just get to the free shipping threshold and the free shipping is very slow.

  6. For me, I don’t consider so much how Amazon Prime would reduce the cost of my previous buying patterns, rather it changes my buying patterns. Before, I would need a measuring cup or something small and there is just no way I would pay $5 shipping for a $2 item, but now, I just order it right away. I don’t have to wait for a larger order to justify shipping or get free (but potentially slow) shipping. I don’t have to compare shipping rates with other sites, I don’t have to drive to a store and waste my time and pay for gas, I just buy it right away. It really simplifies purchasing of those small, mundane items. I just find it hard to believe Amazon can make money from shipping small items like this. I believe in their last earnings report, this program cost them $155 million. We’ll see if it survives.

  7. Very few people will come out ahead on Amazon Prime. As mentioned, paying the fee will drive most Prime customers back to Amazon for all future orders, regardless of how much cash they could save by shopping elsewhere, yet most won’t take this into account when counting their ‘savings’. That keeps them from taking advantage of the MANY online stores that regularly beat Amazon both on price and ship times, ESPECIALLY for books and audio/visual items). What really is driving people to pay for such services is the atrocious ‘Super Saver Shipping’ which uses a combination of private carrier and USPS (and for media items, sloooow media mail). They’d be a lot further ahead just shopping another online store.

  8. Amazon Prime is price discriminating.
    Right now, I have two browsers open. One recognizes me as an Amazon user (and prime member), and is charging me $13.49 for a Kingston 1GB flash drive (“Kingston Data Traveler 1 GB USB Flash Drive ( DTI/1GB )”), and will let me ship via Prime. The other browser doesn’t have Amazon cookies and therefore doesn’t recognize me as a customer. It is charging $11.98 for the same item, and says the item cannot be shipped via Prime. So I save money on shipping with Prime, but have to pay a higher price! Is this not illegal, or at least unethical?

  9. Prime puts you immediately in the que for shipping, and you do jump ahead of super saver customers. I’m a state away from one of their major distribution centers, and I frequently get things within a day.
    I do shop all categories at Amazon. But you also need to be very price-aware at Amazon.
    And, yes. I’m one of those people with Amazon boxes arriving every day. My UPS guy thanks me for keeping him employed. 😉

  10. In the past I’ve had great experience with free SuperSaver Shipping – on occasion it has been less than 24 hours to my office here in NY. Lately, though, things have started to suck. One item (aprox $90) which was supposed to be in stock did not move for more than 2 weeks – eventually they shipped a replacement (a replacement for an item that never actually went beyond “carrier has received electronic shipping information”). At present I am waiting on a couple of DVDs which were released August 1 and have yet to leave the facility.
    Are they deliberately making free shipping suck to move people to Amazon Prime?

  11. First of all you usually get good deals from amazon. Second, the super saver shipping is a nice feature but at I’m always trying to come up with that $25 dollars and buying things that I really don’t want at that moment to get the free shipping. I have experienced fast and slow shipping using this feature. You just never know. The nice thing with the prime is that you get free 2-day shipping no matter the price (as long as the item ships from amazon) and you get discounted 1-day shipping (it is a good deal specially if you buy just one item). Another thing that makes prime a extreamly good deal is that you can share it with up to 4 “household” members. My sister and I share her prime and we divided the $79 in two (by the way we don’t even live in the same house- we both are married and have families of our own). So we are getting the free 2-day shipping for a year at around $40. That is a really good deal besides if you divide it by a year it is just over $3 a month. We have used the prime like crazy specially this holiday season and we already got our money’s worth (we’ve only had prime for a couple of months).

  12. Please cancel rather than publishing my previous comment. This was based on Amazon logons by a friend who is not familiar with the Amazon site. Some or or all of the comparisons involved purchasing the item through third party merchants. The price may have been the same when purchasing the item through directly through as a prime member or not a prime member. I need to look into this further before I can be sure.

  13. I’ve used Amazon Prime for a year now, and I just signed up for another year. In the past I took advantage of Amazon’s free shipping for orders over $25. I often found myself struggling to find something to add to my order in order to reach $25. Then, it would typically take a week for my order to arrive. I live in the sticks, I’m retired, and I enjoy shopping. I think I got addicted to getting deliveries of books, CDs and other goodies when I operated retail stores (natural food stores and after that a bookstore that also carried CDs, gift items, and jewelry, etc.). Getting deliveries was like Christmas. It was fun, and it’s fun to get stuff from Amazon. I don’t drink, and I rarely dine out, partly because I’m on a restricted diet the requirements of which are difficult to meet in restaurants. So to me it works out good that I can order stuff from Amazon without trying to meet a $25 minimum, and get it delivered to my door two days later. People pay for cable TV, DVD services such as Netflix, and so on. To me, paying for Amazon Prime is in the same category. I probably get more value out of it than I do out of my cable TV payments, given that I only watch TV a few hours a week.

  14. Great article! Thanks for doing the math for me and spelling out the plan. Amazon sure doesn’t want to clue you in up front – just want to suck you in and then sock it to ya. I really appreciate your well researched and logical comments. Bless you, anne,

  15. While “Super Saver” shipping sometimes exceeds shipping expectations, it is often slow and most certainly cannot be equated to two-day shipping. In fact, I just ordered some last minute Christmas gifts using the two-day shipping option (today is 12/18), and I am confident that the items would not arrive in time using free Super Saver shipping. This is one of the main points in your article, so the foundation of your article is simply wrong. You really need to do more than borrow from personal experience when speaking in factual terms. The other point that your article misses is that with Prime, you can get items faster by grouping them in separate shipments without paying more.

  16. Actually, J., my experience is quite different to yours and after having ordered dozens and dozens of shipments from Amazon, have found that just about every time Super Saver gets to me within 3-4 days. Maybe it’s a location / distance from shipping facility issue?
    I stick by what I wrote – for me, the economics of Prime don’t work. If they work for you, that’s great.

  17. Super Saver shipping allows all that time as USPS 1st class and ground shipping can be very slow to remote parts of the country.

  18. Amazon is full of themselves. I’ve had horrifically poor delivery experiences 3 out of 3 times. So what they are saying is that I need to pay them more money to align their service with that already offered by their competition? If I’m going to pay more money; it isn’t going to be to Amazon. NEVER EVER AGAIN – NO MATTER WHAT, WILL I DO BUSINESS WITH AMAZON.

  19. Free Super Saver shipping is supposed to be a kind of minimum order bonus program. It induces you to buy more to get the free shipping. They have taken longer and longer to ship items that are in stock (not talking about third parties here!)
    I’m tired of buying more and not getting the items for 3+ weeks. I ordered makeup just to reach the $25 threshold…three weeks later I coulda crawled to Walgreens and back for that 1 pkg of makeup. I live in Oakland CA….this is not the sticks! They’re playing a game called “bait and switch” and it’s not legal.
    Seems user @Verangali has discovered proof of this by comparing the gap in their cookie tracking.
    This is bullshit!

  20. Amazon prime is worth every penny to me. I got a free 1 year membership for being a college student, and I’ll definitely renew it when it ends. I honestly don’t know how they can stay in business with it. I can get free 2day shipping on a 5 dollar tube of glue… Amazon pays more money out of their pocket than the item cost just to ship it…
    Also, overnight delivery for 4 dollars on things is awesome. It normally costs 30+ to ship things overnight so if you generally need things fast (but don’t want to be bothered with trying to find a store that sells the item) it works out really well

  21. I ordered an item by Monday and the end of the week still no be ship, only say “shipping soon” and this have been for 5 day same status… I think AMAZON philosophy is free shipping slow speed to process and ship, this is call “Throttling”… the goal is to sell premium shipping service (Amazon Prime). I make this mistake twice, i just give to them the benefit of the doubt first time happen, now i am pretty sure this is intentional and i don’t like when big companies trying to push a premium service in this way… it’s my money and I will take my business someplace else. There is a lot places shipping is free and they are honest and don’t try to fool customers…

  22. They are not on my good side at present. Right now I have an order placed very early Wednesday that has not moved. (It’s Sat nite.) We buy lots of stuff on Amazon, but they have become painfully slow on shipping. 3,4,5 days to effect shipment, then – good luck… If you order something large or heavy they will send it UPS ground. It will travel at the normal UPS speed. If it’s light or small it gets tossed in the “discount” mail service bin: Smart Post, Parcel Select, DHL Global Mail etc. All of this stuff sits at each stop until the container or truck is full before it moves. Tracking progress is all but non-existent. Like eBay, they are sucking the fun out of online buying. Someday, they too will be wondering “WTH happened ??”

  23. There have been some occasions where I’ve ordered items with the super saver shipping, and Amazon just sat on my order for 1 week before telling me that it’s been shipped. And Prime members do get priority. One time I ordered an item where it said only 2 of them were left, and I used super saver shipping. A few days later, I got an email from Amazon saying it was out of stock! But there were still 2 left when I placed the order!

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