The NY Times today did a nice little piece on Amazon.com. The article isn't about anything new at Amazon, but about their business model. It turns out that Amazon makes money from (according to the article) three things: selling other people's stuff through their website, partnering with larger stores (like Target) and selling their stuff (isn't that like the first thing?), and selling their own inventory (books, etc.). The people the NYT interviewed seem to think that Amazon makes money from the first two, but barely breaks even with the third.
I'll admit to using Amazon (you'll note that my links to books, music, and movies all point to them). I find them simple, with a deep inventory (I can find stuff when no one else has them), and they have really good prices when they decide to put something on sale. Thus, I was surprised to read this (from the article):
"Academic research shows pretty convincingly that people have separate accounts in mind, one for the item itself and one for shipping," said John Morgan, an economist who teaches at the University of California, Berkeley. Using eBay auctions as his real-world laboratory, he showed that changing the ratio of item price to shipping charge, while keeping the total price constant, produces sharply different customer responses.
On eBay, Mr. Morgan found that bidders happily accepted outrageously high shipping charges if they thought they were getting a good deal on the item price of a used CD. Amazon, however, faces the opposite problem: its customers accord more weight to the shipping charge, even if modest, than to the discount on the item itself. Why should this be? Perhaps it is the online customer's chafing at being asked to pay for the privilege of waiting for a delivery.
Does this jibe with other people? I don't use ebay, so I can't comment on that part of the quote, but I don't honestly pay much attention to shipping at Amazon. I don't pay for the express (overnight or two-day) shipping, but the regular ground shipping usually only costs a few dollars, and it gets here within three or four business days (sometimes faster). I'll admit, as well, that I often don't even pay attention to the shipping costs: I'll glance them over to make sure that I'm not paying a lot, but I just treat them like taxes (you have to pay them) and keep moving. I've never been chased away from buying on Amazon by shipping charges. I buy from them because they have what I need (when no one locally does) at a reasonable price.
This wasn't earth shattering, but seemed interesting.
(PS: Amazon, according to the article, doesn't discuss anything - it discloses very minimal financial information, and keeps everybody guessing about what they do, and what part of the business makes money and what doesn't. Interesting business model - don't tell anybody anything.
Posted by baltar at February 12, 2006 01:26 PM | TrackBack | Posted to EconomicsAmazon, according to the article, doesn't discuss anything
That's common among rapidly-evolving tech companies. They disclose what SEC and stock exchange rules require them to disclose, but not much more -- they don't want to give any competitors an earlier-than-necessary heads-up into their evolving strategies, business models, etc. GOOG (among others) is very much the same way.
(Of course, this is true of many if not most big companies of all kinds as far as the general public is concerned. The difference between a company like, say, DCX and AMZN is that DCX briefs Wall St analysts on their strategies and models, just not the general public and/or their shareholders. AMZN won't tell anyone. Which is the more ethical approach is, of course, subject to debate.)
Posted by: jacflash at February 12, 2006 04:17 PM | PERMALINK