Amazon has a Prime number problem

Amazon has a business model problem, I think, not just a Prime problem.

The core of the problem is their almost infinite assortment, which requires the company to figure out A.) which products to keep in which DC, and B.) what sizes of shipping boxes to keep in each DC.

Because it is virtually impossible to calculate what’s going to be in any given order (patented demand forecast engine notwithstanding), it is always going to be hard to get shipment synergies. The company just ships too much air, or occasionally over-packs boxes (cat food buyers beware!).

As much as it saddens me as a customer, I think the company has to do something to mitigate its shipping costs. Drones aren’t going to help. 3-D printing won’t do much. It’s a pure logistics problem, and it’s not easy to fix. Having set the bar on low prices and free shipping, the company is in a tough spot. And investors are getting impatient.

This is clearly a chink in the armor. It’s completely counter to the Prime program and against UX. Recently I came upon “add-on” items at Amazon, something I had never seen before. Free shipping going from $25 to $35, a higher Prime membership rate, add-ons, slower Prime delivery, etc., seem to indicate that the business model is not as infallible as many believe. For me it all harks back to the dot-com bubble days, when huge losses for customer acquisition were acceptable, until, well—you know.

Certainly I don’t believe Amazon is in danger of serious troubles, but I do think it may have to give a little and probably reign back some of its more ambitious undertakings to focus more on core profitability, while it keeps its customer promise and identity.

As it turns out, this is not breaking news—nearly three years ago, Amazon began offering shoppers more say in the economic trade-offs inherent in balancing convenience and profitability.

Even then, I viewed this choice offered to consumers as a good thing. Those willing to wait are incentivized, and those unwilling to wait get the same service they have always enjoyed. It isn’t a “cut in service,” it’s a pretty transparent offer that gives shoppers more choice.

A more complicated version of this is playing out at multi-channel/omni-channel retailers like Walmart, which offers a growing number of options; ranging from online ordering from an expanded assortment shipped to a store (no charge), to online ordering from in-store inventory for same-day pick-up (no charge), to delivery of online orders from stores (a charge). Besides the logistical complexity, communicating these options simply and clearly is a real challenge.

But back to Amazon. Yes, Amazon recently raised the price of Prime membership (like the membership warehouse clubs have done many times). And they continue to iterate at the margins at breakneck pace, both in how they approach shoppers (as in this case) and especially in how they engage their suppliers.

But Prime is one of the pillars of Amazon’s growth model, and perhaps the most impactful loyalty and retention model of the last decade. These changes reflect Amazon’s stubborn vision and flexibility on the details.

On the tail of Q2 results, I’m more concerned about the rapid deflation in Amazon’s AWS cloud computing division and Amazon’s “double bank-shot” hardware strategy, to borrow Ben Thompson’s phrase from his excellent piece a few days ago.

You have to admire the willingness to invest for the long-term. But some of Amazon’s most capital-intensive investments have no competitive moat (or a narrowing moat), and its most profitable units’ ability to subsidize innovation in the retail business is less and less certain.

Closer in to grocery and CPG, Amazon continues on a “path to profitability,”shifting some lower-margin, heavier consumables into the new Prime Pantry program, for example.

Their long-term commitment remains strong, but expect the details to continuously evolve.

This is just the beginning of the permanent effect from self-inflicted troubles. The costs for transportation are only going up making anything less than standard delivery a luxury for many, and the next logical step for Prime customers. When the tax man figures out how to collect without interference, e-commerce giants will be the first to pay, and pay twice as in slower business growth. Amazon will struggle with leadership learning curves through this, and could fall further and faster in market share position. What a mess.

My answer is: Peek, pique and peak. If customers peek at the fact that Amazon is offering a puny, I’d say insulting, credit to get people who signed up for a Prime service to accept less than Prime service, that would have me piqued, very piqued. That’s just not nice, to entice people to take out Amazon Prime membership, raise that rate not too long ago, and now try to cop out with an insulting offer to palliate its own internal management problems. Maybe Amazon has peaked as the online competitive leader, leading itself off the end of a cliff (or peak, as the case may be).

$1 credit is a joke-right? Considering their pricing, it must be.

A dollar in media credit doesn’t seem like enough incentive for Prime members to accept longer deliveries. It seems to clash with the personality and behavioral types who are willing to pay for the membership in the first place.

Of course, Amazon will have a trove of response data in a matter of weeks that may confirm its decision. If even a fraction of Prime members opt for the credit, the cost savings may justify the extra decision on each delivery.

Worth considering: Members who make the most frequent small purchases drive Amazon’s cost of free expedited shipping. Those folks have potential to accrue several dollars per month in credits under this “no rush” program. Maybe that’s motivation enough to move Amazon’s cost needle.

The $1 credit is a way they can reduce some costs by giving people who have Prime an option. There will always be a certain percentage of people who have flexibility. I don’t think this signals any seismic change to their business—they should be looking at all areas for ways to reduce costs and still meet customer expectations if they are to improve profitability.

But I can’t help wonder, if they do have a delivery bottleneck, why don’t they just use their much ballyhooed drone capabilities to alleviate delays? 🙂

Interesting approach, which is to have a “prime paid in full” customer get a discount to not be so prime…What’s wrong with this picture? You pay annually to get prime benefits, and then (if you hadn’t noticed), you then pay a premium per item shipped to use the benefit of being prime, (as in a prime eligible product inevitably costs more than a marketplace product without the shipping costs added in). Maybe it’s a new economic model I just don’t get. Who knows I bet when you get that first drone delivery you will find that you can with frequent droner points get that package delivered free, but if you aren’t an “executive platinum” that first checked package costs even more. Might be easier to just head down the block and buy in-store after all.