August 05, 2006

Shipping Expense at Amazon.com

Database Marketers frequently analyze the impact of shipping and handling rates on top-line sales and bottom-line profit. Amazon.com released second quarter results last week. Their 10-Q filing illustrates shipping and handling revenue. For the first six months of 2006, Amazon received $257 million in shipping revenue, 5.8% of net sales. During the same time period, Amazon incurred $385 million in shipping expense, 8.7% of net sales. In total, Amazon lost $128 million dollars shipping merchandise, or 2.9% of net sales. Amazon accounts for shipping revenue in their net sales line, and accounts for shipping expense in their cost of sales line.

As you may know, most direct marketers at least break-even on shipping expense, with many direct marketers realizing a profit on the shipping of merchandise. Amazon cannot possibly drive enough sales to offset the loss in shipping revenue. A ten percent increase in sales due to free shipping only results in an ever-increasing disparity in shipping revenue and expense.

There are instances in the document where Amazon states that their goal is to drive down expenses. And this is where the strategy becomes plausible. Without shipping and handling expense, gross profit was 28.5% of net sales. After accounting for shipping and handling expense, gross profit was 23.9% of net sales. In other words, free shipping significantly decreases gross profit.

Therefore, if Amazon can reduce cost of goods sold, they can offset free shipping, and maintain profitability. By applying the hammer to their suppliers, they reduce the cost of goods sold, thereby covering shipping expense, theoretically passing the savings along to the customer.

There is a flip side to this. Take my book, as an example. After accounting for shipping and handling expense, Amazon earns between seven and eight times as much profit as I earn from the sale of one of my books. By completely hammering the supplier (my publisher), they pass along free shipping to you.

So enjoy your free shipping next time you order from Amazon! Somebody is paying for it. It isn't Amazon, and it isn't you.

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