Amazon is deliberately losing money on shipping. Should you?

by Kaidi Tiitson

September 12, 2017

Even surging losses on shipping won't deter Amazon from the course of cheap and fast deliveries. Amazon’s representatives have attributed a quarter of its yearly growth in 2016 directly to Prime - the main culprit behind the gap between its shipping cost and shipping revenue. There is a reason why Amazon is losing money on shipping. It's good for business. It is the main reason why it is the biggest online retailer in the world today. But does this mean you should do the same?

Amazon is deliberately losing money on shipping. Should you?

The other day an email popped into my Inbox with a short overview of Amazon’s finances for last year (2016) from Statista. Amazon, the “mother of all online retail” they called it. In my head I could hear it ominously voiced out with a menacing symphony playing in the background, a scene zooming in on the Death Star. “The mother of all evi…” I mean “online retail”.

Sounds about right, I thought.

But, was this feeling of peril really a founded one? Should other online shops keep tabs on Amazon?

Amazon is a true giant in the online retail business. In 2016 it generated sales of 135.98 billion USD. That is almost the GDP of New Zealand!

You would think that there must be signs of slowing down for this seasoned pioneer of eCommerce retail that first went online in 1995.

But, no.

It grew its overall business by 27% year on year from 2015. This is a jump of 29 billion USD – you could buy some nice Easter European countries for that money. Still, let’s not get carried away, the direct retail business revenue was “only” 91.43 billion. The rest coming from service fees from third-party sellers, AWS and Prime subscriptions*.

I actually find there is a myriad of things small and medium-sized online shops can do infinitely better than Amazon (click to Tweet if you agree;). Starting from the user interface and design, all the way to operating a business profitably.

But at the same time my survival instinct is telling me that it is absolutely necessary to learn from the giant in order to improve our own game, and well, to make sure we don’t drop out of the league. Amazon is a huge public case study for online retail – and we all should be paying attention.

 

Amazon’s shipping policy – the holy grail of its success.

Shipping is one field in the online business where Amazon has been playing a game of its own. And being straightforward, Amazon’s shipping policy is one of the main reasons it can be called the mother of all online retail today.

In 2003 Jeff Bezos stated that if he had known how successful free shipping with a threshold was going to be, he would have implemented it a lot sooner. He even apologised to the shareholders for not having done it earlier! And for the past 14 years, Amazon has continued the push for faster and cheaper delivery.

Amazon was also a pioneer not only in offering free shipping but in heavily subsidising shipping costs for those products that did not qualify for free shipping.

The only thing that has forced people to spend even more money on Amazon than implementing the threshold has been, of course, Prime.

Amazon Prime membership offers free 2-day shipping on thousands of products in exchange for a fixed fee. This fee, for example in the case of Spain, is a ridiculous 19.95 EUR per year. Prime is a feature the Amazon CEO himself takes most pride in implementing. And that is quite telling.

The most important takeaway from Prime is that shipping needs to be fast and the cost must seem marginal compared to money spent.

But of course, everything comes at a price. And so, does Amazon Prime.

Amazon's loss on shipping keeps on growing together with its revenue

Last year’s price tag: a loss of 7.2 billion USD on shipping. This loss on shipping has been increasing together with Amazon’s revenue year over year.

It has been often questioned if these huge losses are viable and reasonable, but over a decade of ruling the online retail market seems to suggest that, yes, yes they are.

Amazon has repeatedly stated that Prime customers shop more often, spend more money per purchase and shop a wider range of goods than non-Prime customers.

Amazon’s representatives have attributed a quarter of its yearly growth in 2016 directly to Prime. And not even surging losses on shipping can deter Amazon from the course of cheap and fast deliveries. In fact, they are getting more determined about it than ever.

In a regulatory report in 2016, Amazon stated that:

We expect our cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate, our product mix shifts to the electronics and other general merchandise category, we reduce shipping rates, we use more expensive shipping methods, and we offer additional services. We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing placement of fulfillment centers, negotiating better terms with our suppliers, and achieving better operating efficiencies.

If anything, it seems, they are going to get even more aggressive!

Which also explains why they are building a fleet of cargo planes and developing their own courier services. I am also hoping this is the only reason for their imminent deployment of the Amazon drone army.

This is a logical step forward since in the last 10 years, we have been living in a world that has hurricaned through the courier services sector and left them ruffled and confused.

Their business model has gone from almost a purely B2B to a B2C driven one, with demand growing relentlessly. Meaning that quite often couriers just can’t cope with it.

There have been couriers losing accounts with Amazon because they cannot meet their volumes at suitable prices. Or because they can not provide adequate service levels.

There is also increasingly higher offer for low-cost, but questionable quality, transport services by companies trying to take advantage of the surge in parcel delivery. But Amazon knows to stay well clear of those.

At the same time, there is a lot of lag for premium couriers to modernize their business fast enough to be able to offer a seamless service to online retailers.

Now, for couriers, there is no big problem – no one ever complained about having too much demand. But for online shops, both tiny and gigantic, delivery is key, and this is why Amazon is investing so much money into this crucial area.

 

Think of shipping as not merely a cost, but as an investment into growing your business.

As a small or medium-sized online shop, offering free (or well-priced) fast shipping is key to growing your customer base.

Building some of your shipping costs into your products’ cost structure might seem like reducing your margins, but like Amazon shows, you cannot build an online business with unreasonably high margins in mind. You save, for instance, on rent, personnel and associated taxes. So it makes complete sense to put some of those savings to work by directly investing in your customers.

Amazon clearly demonstrates that offering an affordable premium shipping experience pays off. It will directly lead to faster growth in customer numbers and repeat purchases. This, in turn, means greater revenue and more available cash for business development. Which leads to more sales and bigger customer numbers, and…you get the idea.

Every time I stumble upon a webshop that is clearly trying to make money from shipping, I just cringe. It is like watching someone write their own death sentence. Literally, there is no more predominant reason for shopping cart abandonment than an unexpectedly high shipping cost.

Not only Amazon, but all of the most successful online retailers, subsidise shipping costs by building some of the cost into the product price and slightly reducing their margins. For a small or medium-sized online retailer, offering free shipping, at least starting from a certain total order value, is essential these days.

Now, in situations where building the shipping cost into the price is not viable because of customers price sensitivity, or where there is no more room left for lowering margins, the typical online retailer would be reckless to apply free shipping or even something like Prime (unless they have a parallel business that churns out money like AWS, of course).

However, Primes success is not only about free delivery, but more importantly fast and premium delivery. This means, that even if offering free shipping on every product in your online store would make no sense, providing swift superior shipping at a reasonable price can also work its magic. After all, shipping is the maximum expression of customer service of any online retailer. And we all know the difference good customer service can make.

In conclusion, you do not necessarily have to go to the extreme of Amazon and set out to make a loss for years in exchange for growth.

Yet, you do need to take a good look at your shipping policy and your delivery services and find out how you can make it as easy as possible for your visitors to convert by offering them a shipping service that puts a smile on their face. As Amazon has clearly shown, it is one of the surest ways to an online shop’s success.

Now, all you have to do is just start somewhere. We at Outvio can help with that, join us in the revolution!

 

 

* All Amazon.com Inc related data from: http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual

 

But nothing really beats a first hand experience…

And we won’t ask for you credit card data until you are ready to start shipping. So try Outvio for yourself, there is nothing to lose!