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Amazon's Free-Shipping Price Increase Is Pure Genius

By Andrew Tonner – Mar 5, 2016 at 11:23AM

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Prompting more people to sign up for Amazon Prime, and thus spend more on, makes sense.


E-commerce powerhouse (AMZN) has created a business empire by turning convention on its head.

Though the number of examples seemingly grows with each passing year, one of the most noteworthy, and divisive, e-commerce innovations ushered in by the Seattle-based e-tail giant is its Amazon Prime, which includes free two-day shipping, access to Prime Video and Prime Music, and more.

Viewing Prime as crucial to its long-term success, Amazon continues to find new conversion points to funnel users into Prime, which is precisely how tech investors everywhere should interpret one recent move from the company most likely to dominate the future of online commerce.

Inside Amazon's shipping price increase
Amazon recently increased the order amount non-Prime members must pay to qualify for free shipping, setting the bar at $49 per order to receive free shipping, a 40% increase from the $35 level the company established in 2013.

Amazon kept its non-Prime free shipping threshold at $25 per order for the better part of a decade before beginning to raise the level for a minimum qualifying order in 2013. The move likely reflects the growing costs required to operate Amazon's increasingly complex global network of fulfillment centers. Amazon's 2014 decision to increase annual Prime subscription prices from $79 to $99 in part also speaks to this trend. However, make no mistake, Amazon's increasing free shipping minimums should be interpreted, first and foremost, as an attempt to drive more users to become Prime subscribers.

Why Prime matters
Though Amazon keeps a tight lid on the actual number of Prime subscribers, which almost assuredly exceeds 40 million, the company clearly views Prime as important to its short- and long-term success. In Amazon's volume-driven core e-commerce business, having more orders flow through its business helps maintain momentum on Amazon's famous flywheel strategy.

By some estimates, Amazon's Prime subscribers spend $1,500 on Amazon annually, versus $625 for non-Prime users. Amazon's per-order shipping costs aren't publicly available, so it's anyone's guess whether the service operates above or below breakeven, and the analyst community is by no means in agreement on the matter.  As a general proposition, though, the fact that the notoriously data-centric Amazon clearly wants to funnel as many consumers toward Prime suggests the service is indeed quite important for the company's long-term trajectory, which certainly makes sense.

Taking a longer-term view, Prime and its free two-day shipping serves as a valuable tool to give Amazon users incentive to direct as much of their online shopping as possible through the e-commerce giant. This speaks to the titanic growth runway that Amazon's business enjoys given the relative nascence of global e-commerce that I feel so often gets overlooked in discussing Amazon's multidecade investment thesis. Though Amazon is now over two decades old, making it a veritable dinosaur in the tech industry, e-commerce as a trend remains in many ways in its nascent stage.

As I often reiterate when discussing the company, e-commerce represents a mere 7.4% of total retail sales in the United States, a market with a relatively mature ecosystem relative to the rest of the world. Likewise, data from research firm eMarketer suggests that global e-commerce sales accounted for just 6.4%  of total retails sales last year. In terms of Prime's place in this discussion, the service helps give as much incentive as possible to shop through Amazon. In this sense, Prime serves as fantastic tool to help fuel Amazon's market share growth.

So while the change in shipping prices is unlikely to drive a dramatic financial windfall for Amazon, it certainly speaks to the importance the company places on Prime within its long-term business strategy.  

Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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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