Amazon Prime Goes Subprime with Add-On Free Shipping Gimmick

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Jeff Bezos  CEO of AmazonOver the weekend Amazon.com (AMZN) announced its latest project to get consumers to dig deeper into their wallets. The new program -- called "Add-on" -- enables the e-tailer to offer free delivery on "thousands of items at a low price point that would be cost-prohibitive to ship on their own."

For years, Amazon has put smiles on shoppers' faces and its own delivery boxes with one simple idea: Spend $25 on its site, and Amazon would ship your order for free (and in many cases, tax-free).

In February 2005, the company went a step further, introducing "Amazon Prime," a service whereby, for a small annual fee, the company would ship almost any item to you -- no matter how small, or how cheap -- for the same $0 delivery cost. Subsequent years featured the introduction of free online video streaming for Prime members (February 2011) and even free Kindle book borrowing as well (in November 2011).

As it turns out, as Amazon was ramping up the benefits of Prime, it was also taking a bath on some items: namely small-ticket items, many costing $5 or less, that cost Amazon more to ship than it cost the customer to buy in the first place. And in recent years, Amazon's been paring back on Prime-enabled free shipping of such items.

Now, with Add-on, Amazon will let you piggyback a low-dollar-value item onto your order, making it easier to reach the $25 minimum that qualifies you for free two-day shipping.

What's It Mean to You?

Of course, all this does raise a question: If Amazon will free-ship items totaling $25 without Prime, then why continue to pay $79 a year if the main draw of a Prime membership is free shipping?

The obvious answer is that with Prime, items ship free in two days. Without it, a $25-plus order ships in three to five days. And of course, there's the Kindle lending, the free video streaming, and whatever new fringe benefits Amazon comes up with in future years. If you don't own a Kindle, though, and don't stream your videos, Amazon's big new idea may not seem to be much of a big deal at all.

The Catch

Let's hope, though, that most consumers don't adopt this point of view. Why? Clearly, Amazon's objective in introducing "Add-on" is to goose its sales figures a bit. Snag a $5 incremental, small-dollar purchase that wasn't available on the site before (except in bulk) and you can boost the revenue from a $20 Prime order by 25%. That's a goal worth reaching for.

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But what happens if folks decide Add-on is no big deal? What happens if at the now-highlighted $25 price point, they begin to reconsider whether Amazon Prime is worth shelling out $79 a year for anyway, and Amazon starts losing money to canceled Prime subscriptions? Why in that case, the company just might decide that it needs to make the advantages of Prime a bit more clear-cut -- for example, by upping the threshold for non-Prime free shipping to $30, $35, $50...

A move like that could make Add-on look like a much better bargain than it does right now. But it could cost non-Prime shoppers dearly.

Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com.





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