Amazon’s Got A Brand New Plan
By George Anderson
Jeff Bezos is fixated on cutting prices. As an article in USA Today points out, Mr. Bezos “believes strongly in driving sales growth and cash flow through low prices, mainly by offering free shipping on most transactions.”
The latest cost-cutting brainchild of Mr. Bezos and company is an annual shipping plan called Amazon Prime that offers express two-day shipping on all orders made through the Web site for a $79 fee. If customers need something overnight, they pay a reduced overnight rate of $3.99 per item.
“Amazon Prime is all-you-can-eat express shipping,” said Mr. Bezos. “Though expensive for the company in the short term, it’s a significant benefit and more convenient for the customer.”
Dan Geiman, analyst at McAdams Wright Ragen, thinks Amazon is on the right track. “This all goes toward adding customers and building loyalty, and I’d love to see them do it a little more inexpensively.”
Mr. Geiman is not among those who question whether it’s wise for Amazon to continue seeking to build sales while sacrificing margins. “They’ve been focusing on driving cash flow and dollar (revenue) growth for the long term,” he said. “I’m reasonably confident at some point it’s all going to pay off.”
Moderator’s Comment: Will Amazon Prime help Amazon.com add new customers and increase shopper loyalty to the Web site?
As an Amazon customer, we’ve been pretty happy getting our orders delivered in a week or so for free. We won’t be signing up for Amazon Prime but this wouldn’t
be the first time that Jeff Bezos knew something we didn’t. –
George Anderson – Moderator
This is a terrific move by Amazon on several fronts. First, they generate up-front cash for the business, which is never a bad thing.
That up-front cash comes with delivery obligations but those obligations are tied to sales. Complaining about fulfilling those obligations would be like complaining about paying too much to your sales staff. Both are funded by sales.
As a regular customer of many Amazon categories, I view this offer as an economic benefit. It will cause me to increase my spending frequency with Amazon and may even cause me to buy a more expensive item because my shipping is free. I’ll also be less inclined (though not entirely un-inclined) to shop around. Amazon tends to be fair in pricing most items. Amazon adds increased sales and lower price sensitivity to its Pros column.
Existing customers are the most valuable customers to a business and yet are the ones most businesses invest the least in maintaining or growing. Amazon is doing something to appeal to its best customers and might even expand that group in the process.