Convenience, Not Free Shipping, Is the Key

In October, 2013 Amazon raised free shipping threshold to $35. Then in February, 2016 Amazon raised it to $49. But one year later in February, 2017 it came back down to $35. This week Amazon lowered it again to $25.

There are two reasons why this is an interesting change - free shipping is putting pressure on competitors, and the fact that Prime is moving beyond being a free shipping offering.

We have previously written about the massive costs in providing free shipping. Last year Amazon collected $8.9 billion in shipping revenue, but spent $16.2 billion on shipping costs. Thus the net shipping costs is $7.2 billion. Lowering the free shipping threshold will continue to widen this gap.

But there is no doubt that this puts incredible pressure on Amazon’s competition - few retailers can afford to loose money on every shipping transaction. Amazon is in a position allowing them to offer the lowest free shipping threshold, which unfortunately trains customers to expect it from everyone else too.

This might look counter-intuitive - if Amazon continues to lower free shipping threshold to pressure other online retailers, why would anyone join Prime? As in, if most orders would get free shipping anyway, why pay $99/year for a Prime membership? This is the key question, as it explains why Amazon is willing to go down to as low as $25 for the first time in 4 years.

For a while Amazon kept raising free shipping threshold to incentivized more subscriptions to Prime. But at the end of last year there were at least 65 million Prime members, more than a half of all US households. So while there are millions left to potentially join it, to some degree Prime has already reached market dominance.

Prime hasn’t been about free shipping for a long time. First, the $25 minimum gets free shipping in 5-8 business days, while Prime members get free two-day or even one-day shipping. Some customers would be willing to wait this long, but the rise of Prime memberships suggests that many more want it ASAP. Second, Prime membership itself has morphed to include streaming video and music, and other benefits. This is becoming a very large part of Amazon’s future focus, and will continue to grow in terms of extra benefits to existing members.

Walmart is currently testing if lowest price or convenience is most important for customers. Prime is a bet on convenience. It’s not about free shipping, which is now available for even small orders, but about receiving them quickly and not having to worry about the minimum.

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Juozas Kaziuk─Śnas

Founder of Marketplace Pulse, Juozas wears multiple hats in the management of Marketplace Pulse, including writing most of the articles. Based in New York City. Advisor to other startups and entrepreneurs. Occasional speaker at conferences.

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