Seeking Alpha

Amazon (AMZN) makes so much money off of its Prime customers it could drop the $79 annual fee...

Amazon (AMZN) makes so much money off of its Prime customers it could drop the $79 annual fee and still come out way ahead. Though the company has no pressing reason to cut into the Prime program with it accounting for close to a third of the firm's operating profit, it's a lever which should strike some fear into retailers such as Target (TGT) and Wal-Mart (WMT).
From other sites
Comments (26)
  • Paulo Santos
    , contributor
    Comments (20487) | Send Message
     
    This is a joke, right? eheh

     

    For starters, since AMZN makes no money overall, it's impossible to ascribe profits to the excess purchases one might think Prime subscribers make.

     

    Then, although Prime subscribers buy double the stuff other customers do, that doesn't mean they do it because they're Prime. Much more likely, they're Prime because they do it - that is, they self-selected on the grounds that it would be advantageous for them. This already makes it likely that whatever purchases these customers do, are less profitable for AMZN than those made by regular customers.

     

    Then you have the problem that video has a cost, shipping has a cost and lending books has a cost.

     

    All in all it's more likely that AMZN loses money on the Prime members, than that it makes it.

     

    Also very important - the news are "AMZN makes lots of money on AWS", "AMZN makes lots of money on prime", "AMZN makes lots of money on 3P". Must I remind that AMZN makes no money at all in the aggregate? It's kinda stupid to promote the thing as if it were wildly profitable here and there given that reality.
    13 Mar 2013, 07:29 AM Reply Like
  • Surely
    , contributor
    Comments (218) | Send Message
     
    The funny thing is the previous "Market Current" referenced above, which quotes the Morningstar/CIRP report, says that AMZN makes $78 on each Prime sub. That includes the membership fee AND $$ spent shopping Amazon. So how do you conclude that taking away the $79 fee leaves you "way ahead"? It truly boggles the mind!
    13 Mar 2013, 09:29 AM Reply Like
  • sfphoto
    , contributor
    Comments (678) | Send Message
     
    The Morningstart/CIRP report states that Prime members spend an average of $1200 per year in goods and pays AMZN $79 per year in membership fees. Since AMZN makes $78 on each and every Prime member per the report, this implies that out of the $1200 in Prime ecommerce revenues, AMZN loses $1 per member with the $79 membership fee effectively absorbing that loss.

     

    Before publishing a pump piece, it's a good idea to check the math.
    13 Mar 2013, 08:23 PM Reply Like
  • D_Virginia
    , contributor
    Comments (2280) | Send Message
     
    I love my Prime.

     

    I end up buying from Amazon a lot more because of the free two-day shipping (which sometimes ends up being free one-day shipping).

     

    When I think of something I need or want, I could either buy it from a local store in a day or two, or I could order it from Amazon and have it on my doorstep in a day or two...and Amazon is usually cheaper.

     

    Plus the library of free videos and books, while not fantastic, is getting better all the time.

     

    Worth every penny.
    13 Mar 2013, 07:31 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20487) | Send Message
     
    Exactly, worth every penny for you, but probably not for AMZN, which has to eat all the costs for all the frebbies AND sell at a competitive price or it doesn't sell (ugly business).

     

    This isn't Costco. Costco gets the membership dues as free money. Not so for AMZN, AMZN pays:
    1) The shipping;
    2) The video
    3) And the books.

     

    For instance, given NFLX's margins, if AMZN was to be competitive with NFLX on content, the $79 wouldn't even cover the content costs, never mind the books or shipping.
    13 Mar 2013, 07:34 AM Reply Like
  • D_Virginia
    , contributor
    Comments (2280) | Send Message
     
    But if the price went up, it'd probably still be worth it to me. That's a PR issue, sure, but from a value standpoint, $100/year still isn't bad.

     

    $120? $150? I dunno, I don't have a walk-away number in mind, but $79/year is a steal.

     

    And frankly I really don't care that much about the content libraries, that's just gravy. The meat is in the shipping -- for me, at least.

     

    One customer's data point...
    13 Mar 2013, 07:44 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20487) | Send Message
     
    If the price increased, AMZN would lose the profitable Prime members as they'd revaluate. The profitable Prime members are those that are just members on inertia and don't use the service intensively.
    13 Mar 2013, 07:47 AM Reply Like
  • NWCorner
    , contributor
    Comments (124) | Send Message
     
    It's a mistake to assume consumer behavior is rational. To me the whole point of Prime and all other loyalty programs is to get people to make the (sometimes) irrational choice and to prefer shopping at a particular place based on one particular aspect of the transaction (free shipping, frequent flyer miles, whatever) rather than rationally considering the alternatives. Plus there is a "sunk cost" component. People think, "I've already spent $79 on shipping, I think I'll buy some more stuff".

     

    Amazon may not be making money on this now -- they are almost certainly increasing revenue and gaining mindshare -- but that can all be fine-tuned, if they can stay solvent long enough...
    13 Mar 2013, 09:41 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20487) | Send Message
     
    AMZN's $125 billion market cap is not predicated on AMZN just staying solvent or something.
    13 Mar 2013, 09:43 AM Reply Like
  • NWCorner
    , contributor
    Comments (124) | Send Message
     
    I don't think anyone has a financial ratio-based theory that can explain the valuation, but their weaknesses are not hidden from the market, and the vast majority of investors are institutional and supposedly able to think for themselves. It's too bad we don't have a good model that explains their valuation, but it has been pretty persistent. People have been predicting doom since the "amazon.bomb" days. I'm not holding my breath.
    13 Mar 2013, 10:17 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20487) | Send Message
     
    NWCorner - the valuation has NOT been persistent. That's a myth. The valuation has increased markedly as AMZN's earnings went down the tubes over 2 years.
    13 Mar 2013, 10:27 AM Reply Like
  • NWCorner
    , contributor
    Comments (124) | Send Message
     
    Even worse for the short thesis, then.
    13 Mar 2013, 11:19 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20487) | Send Message
     
    The short thesis is not really based on valuation, as much as it is based on the many threats Amazon.com is facing and which have destroyed its earnings base. Things like:
    1) Increased shipping cost;
    2) Sales tax collection;
    3) The migration of digital media sales towards OS-integrated stores which AMZN doesn't control;
    4) Increased warehouse complexity and cost due to SKU explosion by AMZN;
    5) Increased competition and price-matching by physical retailers;
    6) Etc.

     

    This has wiped out AMZN's earnings at a time its valuation is also outrageous.
    13 Mar 2013, 11:27 AM Reply Like
  • gensearch2
    , contributor
    Comments (1467) | Send Message
     
    How more "profitable" Prime members? Since AMZN lost money in the last 4 quarters, where is the profit?

     

    How much does AMZN spend on two day shipping of $1200 worth of products in a year? Is it more or less than $79.
    13 Mar 2013, 08:01 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20487) | Send Message
     
    Probably more, at $4 per shipment and $25 ASP it would be $192, at $50 ASP it would be $96 ...
    13 Mar 2013, 08:10 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20487) | Send Message
     
    Calculated another way, AMZN had shipping costs of 8.454% in Q4 2012. On $1200 that would be $101.5

     

    Any way one does it, it always comes out ahead of $79.
    13 Mar 2013, 08:16 AM Reply Like
  • JohnBinTN
    , contributor
    Comments (3812) | Send Message
     
    The "free" shipping isn't really "free" in many cases. To wit, I recently priced out an internal DVD drive - $15.99 on Newegg (free shipping, but with their super-saver option, which can take up to a week). Same exact drive on Amazon - $21.99 ("free" 2-day shipping w/Prime). While not "free" in actuality, I am willing to pay the $6 premium for a higher quality of service.

     

    The prime videos are an added bonus, but truthfully we'll usually opt to watch it on Netflix (they have almost exactly the same offerings) because the Netflix app on our TV/blu-ray is better than the Amazon one.
    13 Mar 2013, 10:35 AM Reply Like
  • gensearch2
    , contributor
    Comments (1467) | Send Message
     
    John,

     

    Anytime I consider buying from AMZN I check prices. I also find that there are occasions where I can find the product cheaper. Though I would say that's a minority of the cases. When I do, I buy from the lower priced source. I'm not going to pay a premium, beyond the annual fee, to have something shipped in two days when I don't care if I get it in 2 days or 5 days.

     

    Having said that, I ordered some socket adapters from Amazon for $2.95 that came with 2 day shipping. It would cost me more than that just to drive the round trip to Home Depot.

     

    There was another instance when I found an item at Amazon I wanted which was sold by a 3rd party. I went to the 3rd party website [not with the Amazon link] and found exactly the same product for less. I got it directly from the 3rd party supplier at a lower price and it came with free shipping .... which just happened to be two days.

     

    What I don't know is whether my price comparison shopping is the general rule for prime members or the exception. I still think that if prime users don't do comparison shopping Amazon loses, and the more that do comparison shop just means Amazon loses more money.

     

    I made one purchase last year of a generator that came with 2 day free shipping and saved 2+ years of prime annual fees with that one order over where I could have gotten it anywhere else.

     

    Without a doubt, Amazon is losing money on my prime membership.
    14 Mar 2013, 10:04 PM Reply Like
  • JohnBinTN
    , contributor
    Comments (3812) | Send Message
     
    They probably make money off of mine... Usually when I am shopping for something, I want it ASAP, so I'm willing to pay a couple extra bucks. Maybe it balances out or tips to a net gain - who knows. There may also be a percentage of people that pay for it, and don't use it all (like a health club membership). $79 is an amount that may just go un-noticed on many people's credit card statement.

     

    Anyways, I hope the Prime service doesn't go away or increase in cost too much - nice to have it if I feel like shopping...
    14 Mar 2013, 11:00 PM Reply Like
  • gensearch2
    , contributor
    Comments (1467) | Send Message
     
    The one thing we know from the lips of Jeff Bezos is that he doesn't care about profit. And his bottom line shows it.

     

    There is a three card Monte game being played by the company accounting and the analysts. Where's the profit? It's over there. You look over there and it isn't. Look it must be over there. You run over and it's not there either.

     

    When you have a company that has lost money in the last 12 months. They aren't making any profit. Perhaps we should stop looking for it, because it just isn't there.
    15 Mar 2013, 10:05 AM Reply Like
  • marshamak
    , contributor
    Comments (12) | Send Message
     
    Kudos to you Paul--makes me think some people just don't get it.
    13 Mar 2013, 08:13 AM Reply Like
  • Mark Krieger
    , contributor
    Comments (4109) | Send Message
     
    who wrote this dribble?
    13 Mar 2013, 08:28 AM Reply Like
  • BlueOkie
    , contributor
    Comments (5565) | Send Message
     
    I can buy on line thru Target, get 5% off on red card and get free shipping on any dollar amount! The big box stores are getting smarter.
    13 Mar 2013, 09:00 AM Reply Like
  • Michael428
    , contributor
    Comments (766) | Send Message
     
    Mark

     

    I wrote something in the last two days about what it would take to calculate if Amazon is making money on Prime. Without telling the same story (company would need data of each transaction, etc.).

     

    But you got this correct in one word...just dribble.

     

    Mike
    13 Mar 2013, 09:02 AM Reply Like
  • Lares Capital
    , contributor
    Comments (428) | Send Message
     
    I have Amazon prime because I buy a lot of small items, which would be uneconomical without free shipping. Just reviewing what I recently bought:

     

    HDMI cord ($5.99), iPhone charger ($12.99), a $128 printer - returned with free shipping after I didn't like it. All items shipped free with two-day UPS shipping.

     

    Amazon "revenue" $19, Amazon shipping cost: probably $20-30 (the printer was shipped back). I believe I am pretty typical Amazon customer and a probably very unprofitable one
    13 Mar 2013, 09:44 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (20487) | Send Message
     
    OMG! AMZN is making so much money on that iPhone charger that it could already waive the entire Prime membership fee!
    13 Mar 2013, 09:45 AM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Tools
Find the right ETFs for your portfolio:
Seeking Alpha's new ETF Hub
ETF Investment Guide:
Table of Contents | One Page Summary
Read about different ETF Asset Classes:
ETF Selector