Amazon Still Reaping Benefits from Risk on Amazon Prime

Last Updated Mar 25, 2008 1:08 PM EDT

Now that big-name magazines are explicating the workings of the economy of free, it seems a little odd to think that only two or three years ago a lot of people were dumping on Amazon.com for building up its business by paying for things like shipping. Free shipments for shopping at Amazon? Never!

First, Amazon dared to offer free shipping on orders of $25 or more, provided you were willing to wait a week or more for some orders to arrive. Doomsayers predicted Amazon would land in bankruptcy courts and called for Jeff Bezos' head. Instead, Amazon swung to a profit and margins grew.

Then, in 2005, Amazon introduced Amazon Prime -- which it described as all-you-can-eat two-day shipping for a $79 a year fee. Doomsayers, barely chastened by being wrong the first time, predicted all kinds of trouble for Amazon and called for Jeff Bezos' head.

Now Amazon, like any company, is not immune from doom. But its ornery sayers are being proven wrong once again. Bezos and other execs at Amazon said three things in 2005 about Amazon: 1) it would be costly in the short run but worth it in the long run; 2) customers who tried it loved it; and 3) it would not only boost customer loyalty, but make existing customers buy more products in new categories.

Now, evidence is emerging that, if Mr. Gekko will indulge us with a sacreligious moment - free is good, free works. Randy Smythe, a blogger and eBay powerseller turned Amazon affiliate, offered some evidence in a post on SeekingAlpha. He's seen the percentage of Amazon Prime customers grow to 19% this quarter from 19% a year ago. A small sampling to be sure, but Smythe notes it makes shipping easier for him as well.

And he quotes Deutschebank analyst Jeetil Patel.

Over the past year, services such as Amazon Prime have helped to shift consumer behavior, fuel cross-category shopping and consolidate wallet share into the hands of Amazon.com. This strategy has helped to accelerate user growth, purchase frequency and unit growth at the company in the past year, while the e-commerce market has deteriorated.
Smythe goes on to conclude,
IMO, Amazon Prime will continue to grow and become a larger percentage of Amazon orders. I can't see any reason why today's 3P sellers wouldn't want to have access to that business.
  • Kevin Kelleher

    Kevin Kelleher writes a regular stock column at TheStreet.com and is a contributor to Wired, Popular Science, and GigaOm. He has previously worked as a reporter and editor at Bloomberg News, Wired News, and The Industry Standard.