Has Amazon left money on the table?

CBS News

(MoneyWatch) After fighting against requirements to collect sales tax for years, Amazon (AMZN) finally seems to have given in. The world's largest retailer is now adding sales tax on purchases by shoppers in California, which joined other states where the company is now collecting taxes.

Amazon had long sought to avoid collecting taxes -- after all, that helped the e-commerce giant offer lower prices than local retailers. Yet the company may have nothing to worry about, because early results suggest no loss of business because of its adding state sales taxes. That raises an important question for Amazon and its investors: Has Amazon been needlessly undercutting price... and profit?

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According to Wells Fargo analyst Matt Nemer, consumers in Texas haven't changed their purchasing behavior with Amazon since the retailer began collecting sales tax there in July. A survey of 1,000 Texans showed that 27 percent were regular Amazon customers. That was down from 30 percent before the company started charging sales tax, but the difference was so small that there may be no actual difference.

People were more motivated by convenience than by sales tax. And as Nemer also pointed out, people who say that they'll shop less online if there is sales tax probably overestimate their willingness to abstain out of principle.

So, say for a moment that the Texas numbers aren't an anomaly and that Amazon won't feel any impact from collecting sales tax. That indirectly suggests that Amazon may have been setting prices on goods lower than necessary. If the extra percentage points that tax represents isn't off-putting, it suggests that Amazon has been overly worried about customer price sensitivity. And if the company is wrong about that impact, it suggests that consumers might be less worried about product prices, as well.

Not that people don't want low prices. It's just that, in one study after another, people typically indicate that while what they spend is important, other factors are of equal or even more concern. In short, the ease of selecting and ordering a product online appears to be the more important factor.

In business, there's a phrase called leaving money on the table. As you might expect, it means that an individual or a company has failed to collect all of the money possible in a deal. Although sometimes the money is left for a strategic reason, like ensuring a longer business relationship and the greater total profits it can provide, leaving money on the table connotes a mistake, miscalculation or poor negotiation.

Out of fear that its customers are cheapskates, Amazon may have been leaving money on the table since it launched during the dot-com boom. And while the amounts are small per order, they could be very large when all taken together.

[Disciprine]

It's thinking like this that leads companies to go down the wrong path. There's a significant difference between people ignoring tax and returning to amazon for good prices & good service.

The whole money on the table argument seems rather naive.

[eriksherman]

I would (obviously) disagree. For years, Amazon has assumed that the addition of sales tax would adversely affect its business. That meant it also assumed an enormous degree of price sensitivity on the part of its customers. Such an assumption leads to a heavy discounting competitive model, which likely means looking to compete largely on a price basis. A new look at the results of adding sales tax to the total perceived price of doing business suggests that the assumptions were wrong in the first place.

[ralphing]

I'm confused about this story.

Sales Tax is computed on the total sale price and added. What does that have to do with the price of the items being sold?

[cdsnjs]

What the article was saying was that one of the primary reasons people buy amazon is the price being cheaper, often because no sales tax. The purpose here is saying that perhaps it was always the convenience of not having to leave home.