Photo: RetailWire
Why Is Amazon Paying Prime Members to Choose Pickup Over Delivery?
Amazon.com is paying select Prime members $10 to pick up their online purchases rather than get home delivery. The online giant claims it’s a marketing rather than a cost-saving move.
Customers receive the $10 credit if they opt to retrieve an order of $25 or more at pickup points such as Whole Foods, Amazon Fresh, Kohl’s or an Amazon Locker location, according to Reuters.
Amazon said the $10 Amazon pickup promotion had been used before and is designed to bring awareness to the pickup option. It applies to Amazon Prime members who have never used Amazon Pickup or have not used that service in the last 12 months.
“We offer customers a variety of ways to get their packages, inclusive of delivery and pickup options,” Amazon said in a statement to PC Magazine. “The $10 Amazon Pickup promotion isn’t new, it’s a long-running program as a benefit to customers who want to try a convenient and secure offering to pick up their packages.”
Reports from Reuters, Business Insider and elsewhere still assumed reducing delivery costs was a significant factor in the promotion.
Amazon has undergone extensive layoffs and taken other steps since last fall to bolster profitability. It is also reportedly working on using its delivery trucks’ cargo capacity more effectively.
Amazon began charging delivery fees for Fresh grocery orders under $150 In March of this year. It reportedly began charging a $1 fee in April when customers drop off product returns at a UPS location instead of a more nearby Amazon Fresh, Kohl’s or Whole Foods location. Amazon raised the price of Prime membership from $119 to $139 last year.
Offering in-store pickup, however, also has costs attached and may not be less expensive than home delivery. An often-quoted study from Capgemini from 2018 found the cost incurred per customer order was $10.10 for delivery versus $4.90 for click-and-collect. After recouping fees from customers, however, the cost for online delivery narrowed to $2.02 for delivery versus $3.14 for pickup.
Discussion Questions
DISCUSSION QUESTIONS: What are the objectives of Amazon’s $10 pickup promotion? Is store pickup more profitable for retailers than home deliveries?
Poll
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DeAnn Campbell
Head of Retail Insights, AAG Consulting Group
Mohammad Ahsen
Co-Founder, Customer Maps
Amazon has done a great job improving the overall level of service in the US for its Prime members. I’m not sure what value prop they get by placing an order, waiting for a confirmation email, and then driving somewhere to pick it up. Other than places where porch theft is a big problem or where customers may not have a home address, I just don’t see many people opting for this once the promotion ends.
This is a smart first step to begin training shoppers away from expecting home delivery to be free. It costs retailers an average $10-$20 to deliver, which can almost eliminate any profit on that product sale. This is the main reason e-commerce and direct to consumer businesses struggle to reach sustainable revenue. Giving shoppers a meaningful incentive to bypass delivery is the only effective way to reset how consumers use e-commerce.
Good luck with that! They still will have to deal with the returns problem, terrible packaging problems (they’re trying to fix that, I can see) and the lack of drivers. They will save gas on making one stop rather than 100 (or however many their vans make), but I don’t think they can expect others’ stores to open their doors for delivery at 4am, either…which they’ve been doing lately. Basically, it feels to me like they’re trying to move costs around to others. #fail
They actually do a good job at giving customers a range of pick-up options and locations – from 24hr lockers to 3rd party retailers within business hours. I’ve been playing around with trying them out. If I want it delivered to the Whole Foods near my house it’s a 2 day delivery. If I’m okay with an outdoor pickup locker a little further from home then it can be as quick as same day depending on the product. I think the point of this exercise is getting customers to see the benefit of working with a retailer rather than against.
The economics of fast, free delivery have changed. Promoting pickup helps Amazon shift consumer habits to protect margins.
Pickup tends to be more cost effective than home delivery, especially for remote residences.
More cost-effective at $10 credit visit? How much do you think Amazon is spending now?
If Amazon is offering Prime members $10 to pick-up at designated locations, one can assume that it is costing Amazon something more than $10 to deliver to one’s home, because they still have to deliver to the pick-up location (that’s not free). This seems like extraordinary cost of doing business. This credit, unless purposely inflated to attract more central-pick-up customers is huge and does not appear sustainable over the long run.
I believe it is a distribution savings to pick up in store. If you can get shoppers to pick up, you can potentially aggregate their purchases. If the typical Prime members are like my family, they frequently order individual items that are delivered separately. I’m not sure the study cited above takes this into account in their calculations. Also, you can never underestimate the power of impulse purchases. Every in-store visit counts!
Between fees for returns and now writing checks for pick-ups, it’s pretty obvious that Amazon is investing heavily in trying to incentivize new customer behaviors. “Free” worked really, really, really well. Simple, understandable, and expensive. Fees and check writing are going to be a long, uphill slog, but they have to go there…finally. Free was never going to be sustainable. And the rest of the retail community can be very grateful that Amazon is now doing all the hard work of changing customers thinking and behavior.
I’m with DeAnn Campbell: Amazon is slowly training customers from expecting that everything to do with the company is fast and free. They have used this promotion before so it’s not a complete surprise to some customers. Amazon is using a slow, constant drip of water to announce changes. Change is easier to swallow when it’s not abrupt.
Yeah, but Amazon is no longer the only free delivery game in town. I just can’t see it.
The $10 Amazon offers customers who opt for pickup instead of delivery adds more cost to deliver to the pickup location. We must assume that either the delivery cost is more than the $10, or Amazon is willing to add to the losses in the total cost to accomplish one of two things. Train users to leverage pickup versus delivery more often, or at the very least gather data about the propensity to choose pickup over delivery with a special rebate offer. Either way, this is surely a temporary incentive. I suspect Amazon most likely wishes to learn how effectively they can convince customers to use pickup over delivery while also understanding if there is a demographic or firm-graphic trend in that usage.
I expect the majority of customers who take Amazon up on it Pickup option to be this that have ore incurred or fear that they that they might incur a problem with home delivery. Because amazon covers the cost of stolen packages, I am sure the cost of an instance with a stolen package is far greater than the $10 credit.
I expect the take rate for those that have not have not are not concerned with having a delivery issue will be dependent on the proximity to one of pickup locations.
Most Amazon customers default to delivery. However, delivery is also the most expensive option for Amazon. Incentivizing customers to use pickup is a way of informing and training them that other options are available, not just for receiving packages but for returning them too. However, this isn’t about trying to create wholesale change – after all, Amazon is investing a lot to enhance its delivery times and speeds – it’s about trying to improve efficiency across all delivery methods.
Having the customers pick up instead of delivering MUST be cheaper for them! This is an evolutionary “first step” in unwinding a unprofitable feature…PLUS if the customer is picking up at, say, a Whole Foods store, there is an opportunity for more shopping to happen.
Basically a test to see how much traffic they can drive to the store and see if the customers will do additional purchases during pickup, or vice versa (people do their regular shopping trip and add a pickup). The key is balance to increase utilization of locker space without causing logistical logjam at the lockers in the stores either. Delivering to multiple location is expensive and ability to consolidate to one location does yield some savings, but I suspect it is a cross-sell test also.
Amazon has set the industry standards of free, efficient, accurate, and timely last-mile fulfillment and home delivery as long as you maintain your Prime membership. This relentless focus on speed and delivery has irreversibly changed consumer behaviors and expectations and has placed significant pressure on retailers and brands to deliver a similar fulfillment experience.
However, we know that expedited home delivery comes at a significant cost. Amazon’s revenues could keep ahead of the delivery and fulfillment costs for the longest time. However, as we have seen, with the demand downturns, Amazon had to undergo some organizational restructuring to keep up with the increasing costs to serve.
By offering Prime customers incentives to choose pickup over delivery, they mitigate home delivery costs and build a more sustainable and profitable operating model. They are extending goodwill with their $10 Amazon credit. This also indirectly addresses some of the consumers’ sustainability concerns with such a big carbon footprint to get packages to their homes.
Despite Amazon’s comment to the reasons why this program is available, final mile cost savings continue to be a focus of all online retailers. The challenge is to provide enough incentive for customer pickup. Is $10 enough? Also, retailers need to figure out how to make the pickup process easier for customers, as well as how to add on higher margin sales in Amazon Fresh and Whole Foods. If Amazon can enhance the online/instore experience, this is a definite marketing and top line advantage versus simply cost savings. Finally, the customer pickup incentive may be particularly attractive to shoppers in areas where package pilferage is high.
The figures from the (Capgemini) study strike me as wildly optimistic: it costs more than $2.02 just to have an employee say someone’s name, let alone actually fulfill an order pickup (tho the figures are from at least five years ago, so presumably they would need to be adjusted upward, regardless). Th ~$10 figure seems even more off.
Without getting into the precise numbers – which of course we don’t have – the idea that actually paying someone (to pick something up) is more profitable, or at lest less-money losing, shows just how costly delivery is.
Amazon is clearly rethinking its free shipping options. Increase in use of Amazon pickup locations would help Amazon bypass costly residential package drop-offs. It is a huge opportunity for Amazon to reduce the cost of delivery and also helps train consumers to tender returns directly to the company. Some customers incur a $1 fee for returning packages through UPS while there’s an Amazon pickup/return location closer to their delivery address. Some customer are questioning the value of Prime membership and its benefits.
Getting customers to drive/walk/bike to an Amazon pick up location reduces stress on the network of Amazon trucks and labor. They’ve likely modeled out participation at 8% to 15% of their customers, yielding net-net cost reductions at these levels.
For retailers, it’s more profitable to have customers pick up in-store vs delivery (to outsourced 3rd parties). Grocers especially have found this a sweet spot, because it’s easy for customers to add-on items, generating higher sales.
This is awesome for consumers – arguably a really great incentive for them.
For Amazon the benefits could be significant as well – dramatically reducing the cost of the last mile by effectively allowing deliveries to be consolidated together – a driver dropping multiple deliveries to lockers at once is much more efficient than delivering to multiple homes.
In addition it reduces the risk of fraud / loss of product from doorsteps of customers. $10 is probably a big enough incentive to start to change consumer behaviour.
Security and cost reductions. These are the keys to using pickup, since the products are much more secure rather than “leaving” them at a customer’s door, plus it is much cheaper to leave multiple products, for multiple customers, in 1 location rather than deliver to multiple locations. The cost for the last mile delivery drops significantly!
In my opinion, Amazon understands the importance of omnichannel experience very well. By optimizing its delivery system and establishing a vast network of pick-up locations, particularly through Whole Foods, Amazon has successfully supported its omnichannel initiatives. Undoubtedly, Amazon as well as other companies, aims to leverage and maximize the potential of such networks to enhance their operations.
Last-mile shipping costs are the most expensive part of eCommerce, which is why retailers are encouraging customers to choose options like “Buy Online Pick-Up In Store”. Following a similar mindset, Amazon has adopted a promotional strategy to offer $10 credit to its “Prime Members” for choosing pick-up over delivery. Businesses’ ultimate goal is to manage the cost of goods to maintain net profitability, so even if Amazon is implementing strategies to reduce their delivery costs, it aligns with this objective.
As far as the raise in membership fees is concerned, Amazon is offering services that are worth the price. Additionally, they very well know that their customers are hooked to “Prime”, so they can push their luck into squeezing the pockets of customers who are willing to pay for the extra charge.
Anything retailers can do to provide customers with more options for receiving orders is going to add value to the relationship. As long as customers don’t feel penalized, they will be open to different options and there are definitely a segment of customers that will be excited to take advantage of Amazon’s $10 pickup promotion. However, if Amazon were to flip it and start charging for home delivery, they would definitely receive pushback. It is better to increase the overall Prime membership fee than to start charging per delivery. There is no doubt that the average consumer will see the $10 pickup promotion as a way for Amazon to save money and use fewer resources. But again, there are many customers that will gladly take advantage of that savings. Store pickup can be more profitable for retailers than home deliveries, but it comes down to how efficient the local store is at setting up that process using the existing resources they have.