It used to be that Amazon worked on a very simple and expected principle: customers ordered product, paid for shipping and it arrived a half a week or so later. Prices were comparable to the stores, and users avoided tax, so they could handle to wait a few days for their copy of Braveheart to arrive because they saved a little money and gained convenience.
Then Amazon added Amazon Prime and everything got better. This change allowed users to pay $69 once a year, place their orders, and product arrived the next day. At first there was still no tax, but even after they did away with that, the taxes paid were still lower than they would be at a local retailer. So now customers were saving money and getting product insanely fast.
Initially it was DVDs, CDs and home goods, but people soon realized that this worked for lightbulbs and toilet paper too – things that cost more to ship than they offered in margin. Amazon – and more importantly their competitors – realized that shipping things that had no sense of customer urgency through their regular speedy channel meant they were leaving money on the table.
So Amazon started dabbling with customer-directed shipping alternatives. Some products became add-on items. If you really wanted that $1 roll of tape, you needed to order an additional $10 worth of other stuff. They offered bulk items on subscription where you could only get the lowest price if you promised to buy them every month. And they started offering Prime customers the ability for forego the speedy shipping in return for a $1 credit on digital media – the one product they offer that doesn’t incur a shipping cost.
But it wasn’t hard to work around the add-on restrictions, users eschewed subscriptions and continued to order their diapers when they needed them, and the whole digital credit thing didn’t appeal to a lot of people. Meanwhile customers continued to place single item orders for dog food or bubble bath continuing to thwart Amazon’s intentions.
And then along came a new company called Jet and with it the concept of “share of box.” Jet is a new start-up taking on Amazon that has reportedly raised $750 million. This is a true incentive to buy the dog food, bubble bath, tape, and diapers all at once and have them shipped together. Where Jet fails, is that they still ship everything separately and from different vendors, their selection is paltry, and they augment prices with the funds they have raised from Investors. A recent order showed that Jet paid $55 to buy products from a third party and sold them for $38. They claim that these practices will go away once they negotiate more inventory from additional vendors but obviously no company can sell product for less than they pay for it for too long.
Amazon has responded with yet another new service called Prime Pantry. Prime pantry charges customers $5.99/box for shipping and then allows users to “fill” the box with as many non-perishable groceries, pet supplies, and sundries as will fit. Each item comes with a price and a percentage number that represents how much of the box it will fill. A bag of dog food may take up 7% of the box where a tube of toothpaste takes up only ½%. Even though inventory limitations currently make it difficult to completely fill a box, this service works well. A few days after placing an order, a single, sturdy, handled box arrives with all the pantry items packed neatly together. Clearly Amazon is also trying to tackle the “share of box” issue and seems to be doing a better job of it.
But what cost is Amazon paying? Returning to my opening points, Amazon used to be simple and Amazon Prime was even simpler. Now customers have to wade through Prime pricing, Add-on items, Subscription services, the Prime pantry store, third party vendors, and Prime Now service (same day delivery). Meanwhile, Prime membership has increased to $100. I appreciate Amazon’s need to remain competitive but I fear that all this effort to gain one more customer, is straining their relationship with core customers.
I don’t have a solution to offer them, but I might suggest they wait and see how this whole Jet things turns out. Jet may be getting a lot of attention and financing, but their business model is spurious, their first major revenue pivot came after only two months of operations, and their value proposition is not yet being delivered. Meanwhile, Amazon seems to be forgetting that simplicity was a big part of the “Prime” brand, and this complicated smorgasbord of delivery options may be costing more in brand erosion than it is gaining in incremental revenue.