Why Amazon is making free shipping harder to get

The company is pushing customers toward its Prime subscription. But is profit a motive here as well?

By The Week Oct 24, 2013 11:29AM
Amazon.com logo © Spencer Platt/Getty ImagesAfter more than a decade of offering free shipping for any purchase over $25, Amazon (AMZN) upped the threshold to $35 on Tuesday -- with no warning, and almost no explanation.

In a short announcement buried deep on the site, Amazon mentioned the change while urging customers to sign up for Amazon Prime, a $79-a-year subscription service that offers free, two-day shipping on any purchase, along with a few other benefits.

"Millions of Amazon customers have already made the choice of faster shipping by becoming Amazon Prime members," it says. "The service is so popular that more than a year ago we began shipping more items with Prime than with free shipping. Start your 30-day free trial today."

Clearly, Amazon's new policy seems motivated at least in part to urge customers toward the premium subscription. But analysts see another motivating factor: The company's consistent lack of profits.

For years, CEO Jeff Bezos has famously forgone profits (and thus dividends) almost entirely, instead shoveling close to every last penny into expanding the Amazon empire. Amazon now sells a huge number of products, from books to groceries to million-dollar impressionist paintings. Just recently, "It started selling wine for the first time in New York, updated its line of tablets, gave the go-ahead to three new comedy pilots, and began a design competition for its fashion division," says The New York Times' David Streitfeld.

Though shareholders have largely rewarded this expand-at-all-costs strategy -- Amazon's stock price is now around $325, up from $49 in 2008 -- analysts have started to wonder if Bezos can sustain such breakneck expansion in lieu of profits. Streitfeld, again:
No one is asserting that Amazon is a flat-out bubble, but there is an increasingly noisy debate about when it will — or even whether it can — deliver the sort of bottom-line profits that investors normally demand from a company expected to post $75 billion in revenue this year. [The New York Times]
One way for Amazon to keep its nose above water is to fiddle with its costly customer benefits, which have long served to separate the hulk from its competition and propel growth. Chief among these is Amazon's barely-there shipping costs -- and this won't be the first time the retailer has reeled in those perks. Amazon Prime members used to get any item overnight for an extra $3.99 per item, even if that item is the size of a dishwasher. Last summer, that changed (also without a peep of warning), and now overnight fees fluctuate between $2.99 and $25, depending on the size and weight of the item.

Free shipping, says Paulo Santos at Seeking Alpha, has long been "a central tenet of Amazon.com's growth strategy. And here, what Amazon.com is doing is backtracking on this central tenet." The e-tail giant surely wouldn't risk a ferocious customer backlash were it not "under tremendous earnings pressure," Santos says.

That may help explain why the change occurred just two days before Amazon is set to announce its third quarter profits. The company lost money in 2012, and probably will again in 2013, say analysts. This could be a way to soften the blow. USA Today's Alistair Barr points out another reason the hike may be all about timing.

The change comes ahead of the crucial holiday season, when online shopping and package shipping activity soars and Amazon generates most of its revenue.
Amazon did not say why it made the change. However, Wall Street has focused on the company's high shipping costs in recent years and this may be a way to control such expenditure and boost the company's meager profits. [USA Today]
The good news for Amazon: Free shipping on $35+ purchases still sets it apart from competitors. As The Wall Street Journal points out, Target (TGT) and Wal-Mart (WMT) offer free shipping on any purchase over $50. And while eBay (EBAY) acquired Shutl, a delivery service, to help ramp up its same-day delivery service -- another initiative Amazon has in the works -- it still hasn't matched Amazon's free shipping benefits.

Wall Street, for its part, doesn't seem to know what to think. Amazon's shares rose after the news Tuesday, before plunking back down Wednesday and rising again Thursday.

More from The Week
46Comments
Oct 24, 2013 1:44PM
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Amazon Primes is actually a great deal if you order off the internet regularly. Free 2day shipping, includes 1 book per month on Kindle and unlimited amazon Prime movies. We live in remote area and this is definitely worth the 79$ a year for us. Holiday shipping in 2 days and you never even have to leave the house...no brainer!
Oct 24, 2013 12:38PM
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Don't need Amazon anymore, and even if I did I would never prepay for shipping which is all prime is. Shipping and Handling is the biggest scam there is in online shopping.
Oct 24, 2013 1:17PM
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If you sign up for Prime as a student it is half price I think.  If you constantly buy things from Amazon it's easy to have that Prime account pay for itself pretty quickly.  And it's 2nd day shipping.  The student price I think it is $40 per year, if you have 4 things shipped you have used the cost of the Prime account.  Anything beyond that is free 2-day shipping.  It takes a little more effort to make it worth while with the regular price, but it still might be worth it depending on how much you buy from Amazon.
Oct 24, 2013 2:38PM
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It may be that Amazon is trying to push people into "Prime". But I can personally say that Amazon is inefficient in their "free" shipping.  I ordered 3 spark plugs. Instead of shipping 3 spark plugs in one shipment, they shipped them one at a time. What a pain.
Oct 24, 2013 3:42PM
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Life is complicated enough without having to amortize a membership fee across all purchases and then compare that to current competitor sales and standard pricing models. Just give me your best price including shipping.

 

Ultimately Amazon has to sell stuff, they have to be price competitive and service oriented. If they can get you to pay up front for shipping, they shift some of their competitive work on to you the customer. You have to make sure you buy from them even if what you’re buying might be cheaper (all cost considered) with a competitor.

 

Oct 24, 2013 2:40PM
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I've spent thousands buying online, including Amazon. I won't pay for shipping unless the vendor's price PLUS shipping is lower than from a "free shipping" vendor.

 

Recently I've noticed some hardbound books and some DVDs (series sets) are being priced lower than at Amazon -- at my local (metro area) Costco. In the late 1990s I said that Amazon would probably have the greatest appeal to the comparatively rural consumer. Perhaps. But in any case, Amazon is losing its benefit to the price-conscious customer.

Oct 24, 2013 3:57PM
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We buy on e-bay but the only time we buy is if shipping is free. I will not order any tv ad item's due to the cost of shipping and handling that cost more than the item itself.
Oct 24, 2013 2:12PM
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I love Amazon free shipping and free return for defective product.  I just moved to a remote area in a new state without a car and know the road  yet, this was very helpful for me.  The only problem for me is I tend to buy more than $100 each time.
Oct 24, 2013 2:47PM
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Amazon prime is the same thing as a membership fee to Costco or Sams Club, something I bet the people on here complaining have. 
Oct 24, 2013 6:27PM
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one of the main problems of buying something on-line is getting stuck with shipping and handling charges which at times can actually be more than the cost of the product.  of course the main problems is that you cannot actually see what you're buying, so unless you're already familiar with the product, I would suggest to use extreme caution when buying on-line, or anything offered on t v.  the great thing about buying stuff in a store is:  1)  you cans see, and touch the actual product you are buying;  2)  other than sales tax, there are no other costs, all shipping and handling costs are incorporated in the price of the product.  and 3)  it's far easier to return a broken or defective item, usually all you need is  your receipt, and sometimes the original package.  some stores such as Wal-Mart are so consumer friendly that they will usually take things back without a receipt as long as they carry the item, and it doesn't look like it's twenty years old.  however, I do use Amazon sometimes, especially when I am using my bonus points from my credit card, as they offer a much larger selection of goods than the credit card company does.
Oct 24, 2013 5:14PM
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When you buy something for 12.00 and it cost 6 to 7.oo to get it shipped..Kinda S*cks.
Oct 24, 2013 3:52PM
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I am sure they are making plenty of profits from saving from stores, sale person, and automatic storage in cheap warehouse, customers rating and answering, etc at $25 minimum.  It just goes to expansion right now.
Oct 24, 2013 4:20PM
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Unless you are out in the boondocks you can almost always find the same thing locally that cost less than online plus shipping. People have just become to lazy.
Oct 24, 2013 7:14PM
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Profit is always the motive, don't be silly.
Oct 24, 2013 1:11PM
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GREED? Amazon, my family will  buy nothing online unless shipping is free.
Oct 24, 2013 12:22PM
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amazon stock is inflated by Obama using fed money because owner is financial supporter of Obama.Also amazon has political privileges over brick and mortar retailers since still is not paying sales taxes in more than 50% of states.All retained profits of amazon since he started the business are much less than sales tax that didnt pay ..This proves that amazon is not viable if they have to pay sales tax same as all retailers with physical presence in all states.Also amazon doesnt need  to make profits only needs to show non profits sale increase since Obama inflates his stock using  colluded middlemen that get loans from bailed out  banks with no collateral.jeff Bezos makes billions selling stocks and optioms at inflated prices.His fortune increased 30x since Obama came to power,Any worker in usa increased his salary 30x with Obama?thats Obama's change.The senate must put its pants on and investigate all these illegal stock transactions and  take actions against  thieves.Check graph of amazon stock since Bush time u will see that during bush stock barely moved even operational results were much better than now.When Obama came to power stock got inflated.
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