You Can't Make It Up In Volume
Apr 27, 2018
Amazon losing billions from their retail business and they raise Prime Membership fees.
In the news, Amazon is losing billions from its retail business and rivals should be scared.
"Amazon reported $1.9 billion in net income on $51 billion in revenue for the quarter, and that is only a 3.7% profit margin, but it gets worse when you separate out AWS (Amazon Web Services) and Prime from the retail side of the business. However, if we back out the AWS numbers from the overall results we are left with $45.6 billion in revenue and $500 million in earnings. Margins outside of AWS then shrink to 1%, but retail is actually worse than that."
Don't want to say that I told you so, but this should not be surprising to anyone who understands direct marketing (direct selling) since they are losing their shirt on merchandise returns, shipping costs, and heavy discounting. Returns are increasing and will increase more as their “Try and Buy” program which just launched for apparel gains traction. As any direct marketer will tell you, apparel returns are high enough as is, that asking customers to try 2 or 3 and buy 1, is looking for a way to go out of business. It may be great for consumers, but terrible for your bottom line. To make matters worse, shipping cost for returns on this program are free. Speaking of shipping costs, in an effort to speed deliveries, Amazon and other eCommerce companies continue to add more expensive technologies and services that are increasing, not decreasing shipping costs, which more and more they don’t charge the consumer. And, then we have heavy discounting, which is increasing, not decreasing as they go head to head with their competitors to buy market share.
So something had to give, since Amazon is not about to raise prices across the board, and they have chosen to raise Prime Membership fees. With 100 million members(?), that's an extra $2.0 Billion in revenue a year, if you assume all of their members are paying the annual fee, which they aren’t. [And, much of the retail/eCommerce world wonders why they are having a hard time competing against Amazon.] All you have to do is take one look at their 10-K, knock out revenue from membership fees and selling ad space ($2 Billion + in revenue per quarter) and Amazon doesn't exist.
As a former retailer and direct marketer, I learned a long time ago that you can’t make it (meaning profits) up in volume, hence Amazon’s membership price increase. Of note is that they raised the monthly membership fee last year. So, the big question is, “At what point does the membership fee become so onerous to members that they don’t renew their memberships?”
A $20 fee increase for each member is a 20% increase in fees. That extra revenue will cover a lot of free shipping, returns and discounting costs. But, when will the membership price itself out of the market?
P.S. And yes, Amazon just reported more than doubling their profits for the quarter to $1.69 Billion, but you can bet their didn't do on the sales of goods. Now they just have to keep raking in the ad revenue and membership fees and they'll continue to be profitable...a business model some of their eCommerce/retail competitors wish they could duplicate.
For a related article, read our blog post "Amazon Losing Billions - You Should Be Scared."
Dudley Stevenson, founder and CEO of DWS Associates, has over thirty-five years’ experience in consumer marketing, business-to-business marketing, and direct marketing, including developing, planning, and implementing go-to-market strategies. He's also the author of "Marketing Direct: Breaking Through The Clutter." Working with organizations ranging from start-ups to Fortune 100 companies, he and his team have helped clients such as IBM, Sony, Neiman Marcus, Arizona Highways, Marshall Field & Co., Mrs. Field’s, UNICEF, and Patagonia implement successful direct marketing programs. A longtime member of the Direct Marketing Association and the American Marketing Association, Stevenson is also a sought-after speaker. He’s given hundreds of presentations and workshops on marketing and direct marketing. His “Marketing Planning 101” workshop alone has reached more than 100,000 marketing and sales professionals.