Shipping in the Margins

Glenn Reynolds has been blogging about his signing up for the Amazon Prime program, through which customers pay $79 for year-long free two-day shipping. The first intention that Glenn has for his new deal is to replenish his supply of nutrition bars as needed, rather than travel to Target, buy in bulk, and be enticed by storefront wiles. Now, reader David Walser has worried Glenn that too many Amazon Prime subscribers might smash Amazon's plan:

You wrote that Amazon's flat fee shipping program has changed the way you shop. I suspect that Amazon wanted to change your shopping patterns, just not in the way yours have changed. They wanted you to buy more of the high margin stuff, more frequently. You seem to be buying more of the lower margin (although very nice) products, more frequently. I doubt that Amazon's margin covers the shipping cost on a typical order of food bars. If the flat fee shipping program is too successful in changing shopping patterns to lower margin goods, Amazon (or their shipping partners) could lose a ton of money.

Now, I don't know how quickly the Reynolds household goes through a 15-bar box or how many Glenn is ordering at a time. Assuming he orders one box at a time, the two-day shipping fee would be $8.99. In other words, Amazon could send almost nine shipments of nutrition bars to the Reynolds household before it had to sacrifice a dime on shipping. And let's not forget that 1) these are sales that the company would not have made otherwise, and 2) Amazon takes some unknown cut of the shipping charge, so it can probably send many more shipments before it's actually lost anything.

The more important consideration, however, is that Amazon's potential customer base is still wide open, pending a crack in the resistance to ordering products online. Internet star that he is, Glenn is comfortable in the environment, but many people still are not, with a halfway group (including me) that's comfortable ordering, say, books, but not flat-screen TVs. If Amazon could entice such customers to become accustomed to using its Web site as a first-source for all sorts of little stuff, the big stuff will surely follow, either independently or as "might as well" items tacked on to the regular shipments. Moreover, if — hush, hush — Amazon Prime members share their deal with people other than the allowable "four family members living in the same household," then more people will advance to the halfway group.

The reality is that Amazon and other online merchants don't just have to change "shopping patterns"; they have to change shopping culture. I'll tell you this: in my two weeks as a UPS driver's helper before Christmas, I noticed that Amazon-package houses tended to be regular stops and to receive multiple packages each time. The company can afford to eat the cost of a whole lot of snack shipments before it outweighs the largesse of special-occasion splurges.

I've no special insight into the company's business workings, but it seems to me that, unless a large number of existing Amazon customers use the new option to ship regular orders of low-margin items that they would have paid full shipping price for anyway, Amazon stands only to gain.