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December 20, 2013

Amazon Prime Christmas Offer, One Small Part of Huge Growth Strategy

Amazon gets lots of attention in the press every time quarterly earnings are announced and they’ve logged yet another loss. Analysts still seem baffled by the company’s well-publicized growth strategy that they revealed to investors in 2012, which takes their guaranteed profit and pays it all out in development. Since Amazon’s been around twenty years it’s an unusual choice, most companies that age are resting on their laurels and just trying to stay ahead of the upstarts; Amazon still seeks to beat the upstarts.

They have a good enough track record to keep investors really, really happy. Their original warehouse sales model has killed it at every morph, successfully adding books, Amazon Stores, cloud storage, and digital media. And who knows what Jeff Bezos’ plan is for the Washington Post. This phase of the expansion strategy calls for new fulfillment centers worldwide as well as original content and hardware. They’re also adding small kitschy elements like Amazon Coins, which you can purchase for yourself to gift to a friend for use on in-app items from Amazon Appstore. Excited investors are still handing over the money, thrilled to see this level of innovation and ambition after this much time.

The addition of Amazon Prime may have been one of the company’s smartest moves. For an annual fee of no more than $79, and less for students and moms, you get free two-day shipping. That’s separate from the normal offering of free shipping for purchases over $35. Prime membership also includes streaming media from Amazon Instant Video, which is slightly more limited but still competitive with Netflix, and one free Kindle book “rental” per month.

If you do a simple cost-vs-benefits snapshot analysts have shown that Amazon loses about $11 on every Prime subscription, since the costs of the services total about $90. What’s harder to monetize is how much money is gained by the simple offer of free shipping. What, my shipping is free? Well of course I need to buy the complete hardback Harry Potter set! We’re already shopping so why not add one or two more things we were going to pick up locally anyway?

This Christmas Amazon is luring customers to Prime by marketing the quick, free delivery benefits. While you get free two-day shipping anytime you use Prime, they’re making sure stragglers know that means you have until midnight Dec 22 to buy your gift, without having to go to the mall. It’ll be delivered right to my house? Heck yeah sign me up! You can even order on Dec 23 or 24 and still get steeply reduced overnight or local shipping as a Prime member. More than a few desperate shoppers may jump on that deal then completely forget about it for the rest of the year. In essence, they will have paid $80 for Christmas shipping.

That brings us back to those distribution centers that are part of this head-scratching expansion. The more centers, the cheaper shipping is for Amazon and the less money they lose on these free shipping offers. It’s a remarkable strategy, leaving Amazon investors hoping for a very bountiful Christmas for all.

Edited by Cassandra Tucker

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