Amazon’s Free-Shipping Gamble: Will Rivals Ante Up?

Though overshadowed by word of Amazon‘s (Nasdaq: AMZN) first-ever profits, the e-tailer’s offer of free shipping on large orders may have an even greater impact on the e-commerce landscape, according to analysts.

Amazon’s original offer of free shipping on most orders of US$99 or more, introduced last June and retracted a few weeks later, prompted BarnesandNoble.com to waive shipping costs on certain purchases — a deal it extended even after Amazon dropped its own promotion. Now that Amazon has reinstated free shipping, others may be forced to follow suit, experts say.

“It’s a huge idea,” Forrester Research analyst Christopher Kelley told the E-Commerce Times. “Shipping is a very big issue, both with people who don’t buy online and those who do. It’s going to apply a lot of pressure to other companies in their space to take another look at this.”

“When Amazon sneezes, the rest of the online world takes notice,” Ken Cassar, senior analyst at Jupiter Media Metrix, told the E-Commerce Times.

Refined Offers

While free shipping helped lead to the premature death of some dot-coms, e-tailers have learned to refine their offers, Kelley said, to ensure that “they still attract customers but don’t cause them to lose billions of dollars.”

Free shipping offers are still the second-best way to entice customers to a site, Kelley added, trailing only discounts. Shoppers consistently have expressed disdain for the surprises they encounter when both shipping costs and sales taxes are added to a purchase during the checkout process.

“It takes the guesswork out,” he said. “This will drive traffic to Amazon.”

At What Cost?

But what about the financial risk? In a conference call Tuesday, Amazon CEO Jeff Bezos acknowledged that the free shipping move is a “bet,” and that Amazon has “doubled down” by making the offer permanent.

Amazon’s quarterly numbers show that while shipping brought in money, it also ate up profits. During the fourth quarter, Amazon brought in $125 million in shipping revenue but lost $11 million on shipping. But more than half of that loss — a full $6 million — came from international sales.

Amazon also acknowledged that its free shipping offer will “negatively affect gross margins on our retail sales.” How large that impact will be depends on consumer reaction to the promotion.

But lower margins do mean that the e-tailer and others who follow suit will have to operate at peak efficiency in order to maintain profit margins.

Riverboat Gambler

“Bezos was right to call it a bet,” Morningstar.com analyst David Kathman told the E-Commerce Times. “I’m sure they have crunched the heck out of the numbers, but there’s no way to know for sure how people will react until the results start to come in.”

Cassar is not necessarily convinced the offer is a good idea just yet, either. He has two main concerns. First of all, he said, the $99 threshold “sets the bar high” for customers. Secondly, Amazon is taking on additional cost in a business already marked by tight margins.

“At the end of the day, I think the smart thing to do is at least try it,” Cassar said. “If it doesn’t work for whatever reason, Amazon can always cancel the promotion. They’re smart enough to bail out if it starts to cost them too much on the bottom line.”

Waiting for BN.com

Amazon executives expressed confidence that the offer will work because the e-tail giant has reduced overhead costs by consolidating warehouses and reducing its workforce.

Some light should be cast on the possible financial impacts of the offer next month when competitor BarnesandNoble.com (Nasdaq: BNBN) announces its quarterly results. BN.com has offered free shipping on two or more items since the middle of last year, when Amazon introduced and later retracted a similar offer.

BN.com has stuck by its offer, saying on its home page this week that it will continue to offer this service.

Ante Up

Forrester’s Kelley said Amazon’s electronics competitors also will have to decide whether to match the deal.

But others question whether Amazon is heading in the right direction by declaring the shipping deal a price reduction.

“Our customer data show that convenience is the main reason people shop online, not price,” said Kevin Murphy, research director for retail operations at GartnerG2.

“Theoretically, it’s not necessary to offer free shipping or price inducements as long as you’re competitive. But if customers view it as a convenience, that may be the real appeal of it.”

Murphy said Amazon probably can make the offer work, but only if customers are willing to forgo receiving split orders when items are back-ordered.

“If they can avoid that additional overhead and get people to spend more each time they buy, it should work,” he noted.

Keeping Customers

One point in the offer’s favor is that it may keep bargain-hunters from straying. “If you offer free shipping for one large order, what you’re doing is guaranteeing that the customer who might have shopped at a competitor for part of it is going to do all their buying at once from you,” Murphy said.

“It’s a way to capture sales that might have gotten away.”

“This has always been one of the big problems with e-commerce,” Kathman said. “A large percentage of online shopping carts are abandoned when people see how much shipping is, and Amazon obviously hopes that if it can lure those people to try its site, they’ll like it enough to come back.”

1 Comment

  • I just placed a $120 order from Amazon. I almost went to BN for part of the order, but once I knew there was free shipping on orders over $99, I bought all my items from Amazon. So, it did make a difference in my case. I also checked out our local bookstore to compare prices, and hardback books were on average $8 per book more expensive in the bookstore than at Amazon. That’s significant! How do these brick and mortar retailers hope to stay in business once people realize the savings they can achieve by shopping online – and no sales tax!! I buy all my airline tickets online. And as a matter of fact, after three long, stressful weeks of car-dealer shopping, I just bought a brand new car online via carsdirect.com. I’m a believer!!

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