They make it up in volume!!!

Seriously, most people sign up for the service and don't use it. Like all of those extra services, credit protection, credit insurance, etc, offered with credit cards. Or Extended warranties. They are generally a bad bet for the consumer, and a cash cow for the seller. Also, they get $80 from you up front. Cash is king! Walmart sells some items below cost, but makes money on cash flow, selling the item 2 months before paying the manufacturer.

Remember back in the late 90's when to support the stock price, they would have had to sell every other book in the USA? Well, they are an online Sears or Walmart now. And in fact, they are also a better version of Ebay consignment stores.

In addition to what red said, Having paid for said service (or member cards, etc) you are more apt so shop only them exclusively. Yes, many people do not use the services places offer (I now work at Barnes and Noble and have worked at Home Depot and several other retail places that have cards or memberships of some sort) and that does give them some extra money, but what they are looking for is to keep the customer from shopping around.

I'm a prolific Amazon shopper, but I only use their free (slow) ground shipping. We even use their coffee subscription service.

With the ever escalating price of gas, it really is a no brainer to figure I'm saving 10-30% just by leaving the car in the garage. And there's no smelly crowds in my office, just me. ;)

They lose a little bit on each sale, but make up for it by volume :)?

Wayne, please tell me these things are coming FedEx!

Jay

The big merchandisers have state of the art automated warehouses in Memphis, adjacent to the FedEx hub. Anticipatory stocking is managed by sophisticated predictive-selling models. FedEx extends its cutoff to after midnight for next day delivery with partner companies. All of these tactics help get product to you quickly.

From a cost standpoint, I suspect Amazon rationalizes small losses on a small percentage of sales in order to gain additional sales based on the fast delivery promise. It's a (carefully) calculated risk.

In our business, we catalog parts that sell at very low volume to an equal standard to the parts that sell at very high volume, for the same reason. It's a customer service standard, and it creates differentiation for us against all the alternative companies operating on the old '80/20 rule.' It all evens out.

Wayne when I worked for Logitech, Amazon would get an amazing percentage off because they would buy in such bulk.

Most of the time they were paying under what we sold to distribution on products, and not by a fraction of a percent either, sometimes as much as 5%-10% less.

Real fun when I had to deal with stores complaining that Amazon was selling items with free shipping for what I was quoting people as disti cost.

We do something similar - when you buy our products at list you get all sorts of free stuff (oil analysis, eqt software, part failure analysis, ect...). If every single customer cashed in, it would raise the cost of being able to offer these things. We have a dynamic model that tracks this stuff. Not all customers take advantage of all the benefits offered. They are all paying of it in some small way, just a percentage uses it.

Thye same thing is at work here - they have a keen understanding of the costs associated overall and are able to adjust. I would imagine that next year at this time that fee will increase in response to increased shipping costs. They are hedging is all.

Wayne,

I assume that they have a deal worked out with Ingram on the shipping. Ingram already ships ground for free for orders over $2k (iirc). And that's for my low volume operation. We do maybe $40k/mo with Ingram. I am sure Ingram's deal with Amazon assumes that they will ship ground when possible. Ingram has 10 or 12 warehouses nationwide (locally in Fontana), when they can't source it locally, I'd bet that Ingram is on the hook for some of it.

Also, Ingram and other big distributors (Tech Data, Synnex, etc..) get sweetheart deals from FedEx and UPS because of their volume. They basically have FedEx and UPS shipping offices in their warehouses.

Drag em in and make them compete. Calculate your shipping charges for the past year or two, and send them an RFP. See what happens.

Good luck.

Have you tried DHL? Have been working with them for over 2 years now and my experience with them is so different from UPS and FedEx that it is almost hard to believe they're in the same business.

I think one argument being made here Wayne is that this program is akin to a gym membership. It is so cheap because 90% of the people in the program use it once and never again. ;)