Archives for February 2014

Did Amazon Just Blink?

By Chris Jones | 02/05/2014 | 8:32 AM

In the game of delivery chicken, it appears that Amazon is considering raising the price of one of its cornerstone delivery strategies, Amazon Prime from $79 to as high as $119 per year (see Amazon Considers Prime Price Hike). Prime has been a success for Amazon as it certainly helped drive product sales. However, the current price and relatively unrestricted delivery constraints also appear to have impacted margins. The lesson for all logistics-intensive companies is that, sooner or later, free or highly subsidized delivery-based growth strategies give way to the most fundamental economic theory – profit matters.

As much as anyone in the retail market, Amazon has been sacrificing margin for growth and achieved impressive numbers. I’m sure we all know people who are Prime members and buy “everything” they can on Amazon, knowing that they delivery charge is “free” once they paid their yearly Prime fee. And that success is now a problem for Amazon.

Many retail and distribution companies have been closely following Amazon’s and others’ rise and their forays into new supply chain and pricing models over the last 5+ years such as Prime. Here’s my take on what we could see in the next 5 years in delivery.

Is “free” dead? Free really isn’t the right term, it should be called “highly subsidized”. Supply chain leaders at major retailers I know have long wondered how long this level of delivery subsidy could go on. Amazon, Google, Walmart and others have been chasing this paradigm heavily for the last several years. I believe we are at an inflection point and can expect less “free” and more delivery segmentation pricing and service levels to help maintain or grow margins. FYI, increased delivery service segmentation pricing is also taking place in the B2B markets as they face similar delivery and profitability pressures.

Are burying delivery costs a good thing? Delivery is as much a value proposition for customers as the products that are getting delivered. Amazon simplified, but may have actually over-simplified, delivery pricing. When you read the reports of Amazon customers on the proposed Amazon Prime price increase, some say they don’t care if it goes up because they know that this is a ridiculous deal and others say they will leave because they think it is unfair. What is really at issue is that neither of them respects the value of delivery because it has been bundled away. Standalone delivery pricing and service levels will become more prominent again.

What do customers really want? It’s simple -  pricing and service choice. As I mentioned a year ago (Amazon Home Delivery: Its’ About Choice, not Same Day Delivery), when Amazon shared the results in a limited trial of same-day delivery they sold a lot more goods, but hardly anyone took the same-day option. Customers accept a simple and logical view of delivery pricing. During the buying cycle, customers need a simple way to understand their delivery options and the prices associated with them and then make their own choice. I believe that based upon the experience of other retail markets around the world, that there is way too much hype in the retail market over same-/next-day delivery versus choice. Retailers are in danger of blindly chasing an expensive delivery scenario that may or may not be true. The focus in Omni-channel will shift from selling to delivery to provide customers with more choices that are also profitable for retailers.

Amazon’s statements about changing Prime pricing presents retail- and distribution-intensive companies with an opportunity to step back on their own strategies. I believe that we will see folks like Amazon continue to be innovative with new delivery models that improve service, but keep a closer eye on their impact on bottom line performance. What is your company doing to provide greater delivery choice, but keep the profits? Let me know.

The opinions expressed herein are those solely of the participants, and do not necessarily represent the views of Agile Business Media, LLC., its properties or its employees.

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