Why Did Amazon Raise Its Free-Shipping Threshold From $25 to $35?

You had to be living under a rock if you didn't hear that Amazon on Tuesday raised its threshold for free shipping from $25 to $35. The media amply reported the news aspect of the announcement, so I'm here, not to repeat the news, but to explore a few of the issues the announcement raises: First, WHY Did Amazon Raise Its Free Shipping Threshold From $25 to $35? Second, WHAT do others in the retail industry think? Third, WHAT do consumers think? Fourth, did you ever wonder (as I do) What is FREE SHIPPING anyway?! Isn't free shipping an oxymoron if you have to buy a minimal amount of product in order to receive the free shipping? In the end, it all comes down to eCommerce Online Retail Competition and Online Retail Pricing Strategies.   

Finally, assuming that we don't have the facts and figures to explain Amazon's threshold raise, the following comments, while speculative and subjective, provide us a few candid viewpoints on Why Amazon Raised Its Free-Shipping Threshold:

1. Costs:

-- The move will help the e-tail giant offset some of the massive costs associated with shipping stuff all over the country for free.

-- They used their data to establish this threshold and to determine that the benefits are material and that any fallout is minimal.

-- The company is set to report its quarterly earnings on Friday. (Could the raise be to help project a better financial outlook)?

-- Amazon (has) created a moat around their business and improved their brand image to the point where they can start turning their large customer base into increasing profits.

-- Earlier this year, Amazon.com had warned that its shipping costs were going to increase during the holiday season. Shipping isn't cheap, especially during the holidays. In the last three months of last year, Amazon spent nearly $1.8 billion on shipping. (The company wouldn't say how much it spends on free shipping).

-- Amazon has often been criticized for their small profit over the years, so it is about time they did something about that. They won't lose any moneymaking customers over this - their offerings are too good. 

2. It's About Amazon Prime:

Amazon customers with prime membership of $79 a year will continue to get their purchases shipped for free.

-- Amazon will gain by moving an increased share of customers to the higher profit, loyalty, and advocacy experienced by their current Prime members.

-- Prime's free two day shipping is a great tiebreaker when purchasing products online or even at a physical retailer. Prime eliminates any shipping cost barriers to purchase. Why shop anywhere else when you get great service and free shipping with Amazon Prime?

-- My Amazon Prime membership is very easily one of the best purchases I've ever made… it's paid for itself half a dozen times (Alaska Consumer).

-- My wife and have Amazon Prime, but it's been a "lost arrow" for us since we've almost stopped shopping on-line due to credit card security concerns and the desire to see our tax money stay closer to home - our schools and roads deserve that!

3. It's An Efficient Business Move:

-- In the longer term, this is probably a good idea for Amazon (to be followed by raising the cost of a Prime membership). In the shorter term, though, given the fact that a number of stores are offering free shipping on everything, you have to assume that lower-ticket sales will move away from Amazon, for now.

-- Look for other retailers to review their free shipping thresholds.

-- In the future, Amazon may further increase their margin on items.

-- Rest assured that Amazon has enough big data to evaluate breakeven and profitability on shipping costs, as well as cart abandonment. Amazon is definitely the market leader who sets the trends. You can safely bet that other retailers are carefully watching to see if they can follow…It also gives other retailers, who really can't afford free shipping, "a license to charge".

4. Something To Do With Consumers:

-- Free shipping lures in customers. In the first half of this year, Amazon said about 30% of its sales increase in North America came partly from free shipping offers.

-- I'd much prefer the option of free shipping on all items and deliver them to an Amazon location for pick up in 3-7 days than filling up $35 or joining Prime.

-- I tried Prime, and I don't buy nearly enough or frequently enough, or use the online media services Amazon adds to the Prime to justify paying for it.

-- AMZN's stock price wouldn't be sitting north of $300 if it weren't a profitable company.

-- Buy Local: Go to the brick and mortar store and buy it and bring it home yourself...like Americans did it for 200 years... I order so much online because the stores just don't have all of the options I want, especially for my children... My problem with buying locally is that I end up picking up a few extra things that I may never use, even though I support mom & pop shops.

Bottom Line For A Retailer's Bottom Line: 

Here are my choices of best comments on Amazon's Threshold Raise:  

*Best Comment: "Look, there's an easy way to make customers happy: sell stuff near cost, offer free shipping, and make it all simple for the customer. But Amazon's financials indicate that by doing so, it has been losing money at the low end of order sizes.

You can't make up losses on each sale with more volume, so this move was inevitable. Yes, it will hurt Amazon's $25-$35 basket, non-Prime sales to some degree, but those were unprofitable sales to begin with.

Instead, Amazon will get (a) some profitable, sub-$35 sales where shipping gets charged, (b) some profitable, $35+ sales with free shipping, (c) some profitable and revenue-driving upgrades to Prime, and (d) some lost, huffy, unprofitable customers." Ben Sprecher, Business Development, Google, in Amazon Ups Threshold For Free Shipping, By George Anderson, Editor-In-Chief/Associate Publisher at RetailWire. 

*Best Comment:  "Wells Fargo analyst Matt Nemer said that the new shipping threshold could add $400 million to $1.15 billion to gross profit in 2014. Nemer said that boosting retail profit could turn up in the bottom line. The alternative is that Amazon uses the profits to invest in the grocery business, emerging markets or AWS. My money is that any gross profit bump will be reinvested."  Amazon's Q3, Q4 outlook: How a free shipping threshold ups the profit ante in ZDNet.   

*Best Comment:  "On the company’s earnings conference call today, (Oct. 24) Amazon CFO Tom Szkutak said that in the intervening ten years since Amazon introduced Super Saver Shipping, transportation costs have gone up while Amazon has broadened the program to encompass more products. At some point, they needed to change the magic number for free shipping to keep up with costs, and now seemed like a good time." Why Amazon raised the Super Saver Shipping threshold, GeekWire.   

 

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Gilon Miller, CMO

About Author

Gilon is a seasoned marketing, sales and business development executive with over 15 years of experience in the software and Internet business. He is the Founder and CEO of GuruShots. Previously, Gilon was the CMO of Upstream Commerce, VP of Marketing at iMDsoft and Director of Global Marketing at SAP. He earned an MBA at the MIT Sloan School of Management and a BS in Electrical Engineering from Tufts University.
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