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Amazon Prime Loses Money But Is Considered a Success

This article was written by in Career and Work. 8 comments.


I haven’t always been a fan of Amazon.com as a company. There was a time early on in the company’s ascent that its innovators pushed through a patent application for the process behind its one-click purchasing mechanism. It seemed to be such a basic feature for any e-commerce website, including websites in existence before Amazon.com, that I couldn’t believe that the company’s patent application would be approved.

Nevertheless, Amazon.com was successful with this tactic, and sued other companies for daring to allow their customers to purchase items online with one click. The fight over the rights to this basic functionality inspired a boycott.

Amazon has obtained a US patent (5,960,411) on an important and obvious idea for E-commerce: an idea sometimes known as one-click purchasing. The idea is that your command in a web browser to buy a certain item can carry along information about your identity… Amazon has sued to block the use of this simple idea, showing that they truly intend to monopolize it. This is an attack against the World Wide Web and against E-commerce in general.

The above is from the GNU Operating System and the Free Software Foundation, the group that organized a boycott in response to Amazon.com’s actions.

Despite this frustration, over time I’ve become an Amazon.com fan. For music, movies, and books, I can only occasionally find other stores with lower prices. I even pay extra each year for membership in Amazon Prime. This ensures I can receive what I order in less time and for less money; two-day shipping is free on most products “fulfilled by Amazon.” Apparently Amazon Prime also includes free movie and television streaming, similar to the service from Netflix, but I’ve never found anything available for free that I’ve wanted to watch.

This program reportedly loses money for the company. The cost of a regular subscription to Amazon Prime is $79 a year, but Amazon spends more than that to cover the extra services provided with membership like free two-day shipping and media streaming. Even with a loss of $11 per customer per year, Amazon offer limited-time free and discounted membership to students and stay-at-home parents.

On paper, analyzed in a vacuum, this is crazy. The company is expanding a program that does worse than just not paying for itself. It’s clear, however, that the company’s loss on Amazon Prime membership has other benefits. Customer loyalty, in general, is a remnant of the past. Consumers, particularly through this recession, shop around more, putting the bottom line ahead of all other dimensions of comparison. When a commodity is roughly the same, the only thing that matters is the lowest price. Why should I buy an album at my local record store, a camera lens at my local camera shop, or a book at my local independent bookstore if these products are identical and cheaper from Amazon.com?

Not only does Amazon.com want to be the best choice by price, the company wants to be the only place you look. The members-only approach — membership has its privileges — ties the customer to the company, particularly if membership is not free. If I’m paying $79 a year to be able to receive products I order one day earlier for the same price, I want to maximize that benefit by shopping at Amazon.com as often as necessary. Even if the company loses $11 on each Amazon Prime member each year, Prime members buy products from this particular online retailer more often. Taking a loss with one program allows the company, as a whole, to grow.

This is a concept that is occasionally lost on the more narrow-minded corporate executives. Not every program or product needs to meet the same financial goals if there is some other way of measuring the benefit to the company. The financial benefit may not appear to be a direct link between the program and the bottom line, but a program exists as an expense while allowing the company to grow further, to reach a different audience, or to build a brand reputation in the market, can certainly be worthwhile. The problem usually comes down to a corporate structure that involves too many layers of management. You might see some corporations with all managers being held to the same fiscal standards regardless of their responsibilities. A multitude of managers need to appear effective, so they make choices that look good on paper — focusing on the bottom line — but do more harm to their company than good. There’s no point in saving some pennies in by cost-reducing one area if doing so will cause significant losses or hardships, measured by numbers or reputation, in another area.

The one illustration I’ve come back to often is simply the value of human assets. I’m not normally a fan of the writing of Stephen Covey, the author of The 7 Habits of Highly Effective People. In general, a person’s effectiveness is more a function of his or her value to an employer rather than to any intrinsic value. Nevertheless, with his recent passing, I was pointed to a poignant quotation from his writing:

We need to break away from the Industrial-Age psychology that labels people as expenses and cell phones as assets. Jobs should cater to our interests. Instead of telling people what they’re hired to do, we should ask them what they love to do. Then create a marriage between that passion and your needs.

This quotation mainly addresses the idea that human might be more effective — in fact, perhaps even more fulfilled, an intrinsic value — by aligning their daily work with their passions. But I want to focus on the first sentence. Look at any corporate profit and loss statement or income statement. Salary and benefits are expenses. These should correspond with line items on a balance sheet: employees as assets. But they don’t. In the business world, employees are not considered assets.

All assets — for example, houses, cars, and investments in the stock market — need to be maintained in order for them to retain value or to grow. Good corporate leaders understand that employees are assets too, also needing maintenance, even if they don’t appear on the balance sheet. Once all goals are set aside other than the short-term bottom line, a workforce looks like nothing more than a significant opportunity for expense reduction. There’s always a case to be made for evaluating the quality of a workforce, but good corporate leaders make the best decisions by looking at the big picture.

Photo: William Christiansen
GNU’s Amazon.com boycott

Published or updated July 16, 2012. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 8 comments… read them below or add one }

avatar Barb

That sounds very much like Amazon’s operations. Their goal is to get people to rely totally on Amazon–it’s why they started selling ebooks for so little. They lost money on them, but people bought Kindles, which was the goal.

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avatar Ceecee ♦53 (Newbie)

This reminds me a bit of Costco—–in reverse. They have a miniscule markup on their products and make their money on the membership fees, so I have heard. I do love Amazon. I am not a shopper by nature, and to be able to pull up what I want and hit the buy button makes my day. But I have not subscribed to Amazon Prime…..yet.

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avatar jim

Personally Amazon Prime has caused me and my wife to be bigger Amazon customers. Its just easier to have the free 2 day shipping since it makes online purchases much more convenient. Without Prime I’m much less likely to order some items online since I’d be waiting an unknown timeframe to get the product via cheaper ground shipping, but with Primes 2 day shipping I know it will get to me in a couple days. Without having Prime I would rarely want to spend extra for faster 1 or 2 day shipping. For example, say I want to buy something mundane like a doormat. I would normally wait till I have a chance to run to Target to see what they have. Or I can get on Amazon right now and buy one and it will get to me in 2 days, which is probably just as fast as it would take me to find the time to get over to Target.
Without prime’s 2 day shipping theres really no way I’d even think of buying a doormat on Amazon.

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avatar Jenna, Adaptu Community Manager

I wonder if they’ll up the price of the Amazon Prime membership in the near future. Once you have them hooked will people be willing to pay more for the same service?

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avatar William @ Drop Dead Money

The way I’d look at it is they spend $11 per member in advertising/marketing. Any successful business needs to have a marketing budget and all the marketing texts say your existing customers are your best and most likely prospect. In all, it undoubtedly pays for itself.

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avatar Lance @ Money Life and More

I think Amazon is pretty smart in making products that suck you into Amazon even at a loss because they know if they get you hooked your product purchases will more than cover the loss. Of course there are some customers that will take advantage and probably not turn a profit but for every one of those I am sure there is a crazy over spender. It all balances out in the long run or Amazon would have been out of business years ago.

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avatar wylerassociate ♦162 (Cent)

Amazon is like Costco because you get sucked in and end up buying more things than you need. Besides every episode of NYPD BLUE is available to watch on Amazon Prime. That is worth it for me to sign up for Amazon Prime.

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avatar qixx ♦1,895 (Half-Dollar)

I’ll be signing up for Prime once my wife’s Amazon Mom subscription runs out. Well worth it in my opinion just for the faster shipping.

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