Amazon.com's feel-good free shipping comes at a cost

23.10.2008
My favorite thing about Amazon.com is the low prices -- lower on most items than pretty much anywhere else.

My least favorite thing is shipping charges. Luckily for me, a few years ago Amazon introduced : a US$79 annual service that gives subscribers free two-day shipping (and $3.99/item overnight shipping) on almost everything Amazon.com sells (it doesn't cover shipping on third-party fulfilled products).

When the program was launched several years ago, I signed up and have been buying many more products from Amazon ever since. It's a win-win situation. Amazon gets more sales, I get my stuff quicker without grumbling about shipping costs getting tacked on to the end of each order.

Of course, the shipping costs didn't just go away because I coughed up $79 per year. Amazon's page lists two-day shipping for books and video games (my most common purchases) for $1.99 per item or $9.99 per shipment. If I order 8 shipments a year, I'm saving money -- but at what point is Amazon subsidizing my shipping costs?

Buried in Amazon.com's , is an item titled "Shipping Activities". Outbound shipping charges to customers -- amounts paid by customers for shipping, presumably including Amazon Prime -- totaled $171 million for the just ended quarter. However, outbound shipping-related costs -- what the company is actually paying for shipping -- totaled $323 million for the same time period, a total cost to Amazon of $132 million. For the first nine months of 2008, Amazon covered $388 million in customer shipping costs.

A lot of money, to be sure. But, a good sign for Amazon in the end. The company only shelled out $250 million for shipping in the first nine months of 2007 -- shipping prices are going up because of the increased cost of fuel, to be sure, but it also means that customers are buying more. And, of course, these costs are passed on to the customer in the form of higher prices.