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Instant Analysis: Increases Free Shipping Minimum on Orders

By Evan Niu, CFA – Feb 22, 2016 at 12:45PM

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The e-tailing giant really wants consumers to sign up for Amazon Prime -- either that, or start paying for more of their own shipping costs.

What happened?
E-commerce heavyweight (AMZN -1.57%) has quietly increased the order minimum required to qualify for free shipping. Orders of $49 or more now qualify for free shipping, up from the previous minimum of $35. Book orders of $25 or more will still qualify for free shipping.

This change does not apply to Prime members, who enjoy free two-day shipping on Prime eligible items.

Does it matter?
This change will have two effects for Amazon. First off, it gently nudges consumers to subscribe for Amazon Prime at $99 per year. Customers would then likely get free two-day shipping on those items since the vast majority of items on Amazon are eligible for Prime shipping. The second is that Amazon will marginally increase its shipping revenue by not footing the bill on all those orders between $35 and $49 that previously qualified for free non-Prime shipping.

Last year, Amazon paid a total of $5 billion in net shipping costs, so the expenses definitely add up. As a percentage of net sales, that figure comprised 5.1% of Amazon's top line, which was up from 5% in 2013 and 2014. An increase of 10 basis points may not sound like a lot, but that puts a little squeeze on profitability since Amazon's core North American e-commerce business has an operating margin of just 4.7%.

Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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