Disclosure: I'm not here to sell you on the virtues of Amazon, and chances are you already know how cool they are. One of the best deals in the universe is Amazon's Prime Account
When it first debuted, I was puzzled for about 5 minutes. "Who buys so much stuff at Amazon.com that they could justify a $79/year membership?" Then I did the math and realized that if the average person buys even 10 times from Amazon in a year, they stood to recoup most or all of those losses, because the primary benefit of Prime is free 2-day shipping. (And once you get used to it, it's hard to go back, which is why they're happy to let you try it! Especially now that they've given Netflix a run for their money with lots of free-to-stream TVs and Movies for Prime members!)
I've used Prime to buy (and return) heavier items, too, like exercise equipment that weighs over 100 lbs. The shipping cost had I purchased it without a Prime membership was over the cost of a Prime membership. So I started to then be puzzled about Amazon's policy. Couldn't they lose money on this?
It turns out, for certain items, Amazon prime is almost magical. Marketwatch has an article on this very phenomenon that pointed this out:
The Cannon Commander Series 54 is designed by Cannon Safe to hold up to 48 guns, but can also be used to protect jewelry and important documents. It stands 6-feet tall, features a 5.75-inch thick steel door with 13 locking bolts and sells for $3,486.57 on Amazon.
“We charge customers around $700 to ship this safe, but when they buy it through Amazon they get it shipped for free,” says Pasquale Murena, marketing manager for Cannon Safe. “As a result, we get orders through Amazon every day.” In fact, Amazon will pick up the tab for shipping the safe even for non-Prime members, if they are willing to wait a few extra days for delivery. Like many items priced over $25, it qualifies for “Super Saver Shipping,” which usually take five to eight days to arrive. (SOURCE)
There are a number of reasons this pans out in Amazon's favor, at least over the long-haul. Part of the cost is absorbed in shipping contracts where, by the purchasing of massive bulk of shipping arrangements, they are able to secure for themselves a price-to-ship that is so low that they can practically give it away. I figured that out early on, but it seems that that's only the tip of the iceberg.
I shared an infographic about lifetime customer value last month, which used Starbucks Coffee as an example to show that, on average, if Starbucks spent over $1000 to gain a new customer, they'd turn an overall profit in the long run, because while each coffee is [relatively] inexpensive, the average customer is worth thousands of dollars over the course of their lifetime of Starbucks use.
Amazon's lifetime customer value will depend on how much the customers use the service, and with a service like Prime, using Amazon.com for little purchases (a book here, a toy there) and big purchases (a safe, a recumbent bike). Slowly but surely the sheer convenience of having things delivered combined with the ability to get practically anything you can think of to purchase, have slowly tipped the scales in Amazon's favor.
Even if they lose $700 shipping you the safe, they probably turn a fair profit on that safe, and everything else they sell you over the course of a month/year/lifetime. A mere $600-800 profit spent to aquire you
You're not Amazon. You probably will never own a multi-billion dollar, globe-spanning empire. Probably.
But you can still learn from Amazon, and Starbucks, and all of these other huge businesses (who pay huge dollars to lots of folks to crunch the numbers on the lifetime value of a customer), and become comfortable with the concept of it "taking money to make money." Your job is just to determine what's the best way to spend those dollars.
We can help you with that, by the way.
A second corollary you can take away from amazon (and Starbucks) is to always seek to build a culture around your business of people who love what you do. People are naturally passionate about coffee, so Starbucks is easy, but did you know that there is a whole Amazon-subculture dedicated to making hilarious product reviews
By the way, have you ever seen the inside of an Amazon shipping facility?
Click the link to see more!
Art G. via Compfight