Saturday, February 01, 2014

Amazon Prime Pricing

Amazon is hinting at a price increase for Amazon Prime. Makes sense to me. Although a pretty major Amazon customer, I have resisted Prime for years. I am rarely in a rush, so the Super Saver shipping, free with a $25 minimum, worked for me. This Christmas I needed wanted something fast, so I decided to give Prime a try. I'm happy enough, but still not sure I will renew it. But I digress--the point of my post isn't to dwell on the consumer benefits of Prime, it is to look at it from the Amazon viewpoint.

I think I understand the general idea behind Prime. Make Amazon fulfillment more "frictionless", make people feel like they need to get their money's worth, collect a nice fee up-front. But the economics do seem daunting. For instance, Amazon just shipped me this huge box

(albeit not overly heavy) containing a set of $20 hubcaps, and a $20 water filter. Small order, low margins, before shipping costs. I'm sure they get amazing rates on their shipping, but still, it's hard to imagine it cost less than $5.

Part of the problem is that there is absolutely no incentive for the consumer to economize. In this case, I would have been perfectly happy if it took a week to arrive. I didn't need 2 days. But they both cost the same with Prime.

So here is an idea. Maybe Prime lets consumers get stuff 2-day and 1-day at a discount, but not free. Free would be standard shipping. Prime would be maybe 50% off. Or maybe 70% off. I don't have a strong opinion on what is the ideal precise number, but it has to ensure that consumers have enough "skin in the game" that they consider reverting to standard shipping when they really aren't in a hurry.

Note that this helps Amazon reduce their Prime costs in two ways. One, by redirecting a percentage of shipments from 2-day to cheaper standard ground. Two, by extracting a substantial "co-pay", when the consumer does choose Prime.

I know, it lacks the beautiful simplicity of all the 2-day you can eat, for one low annual fee. And I do think it is very important that Amazon can be positioned as providing free shipping. Especially for e-commerce newbies, the assumed cost of shipping can be a major perceived barrier. So it is an important competitive weapon for Amazon to be able to take this off the table. But I'm not sure they have extend that two 2-day.

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