The financial risks of Amazon Prime

Photo courtesy of JwvanEck

 

I periodically buy things on Amazon. Not all the time, and I don’t keep up much what the giant of Seattle (the other one, not the one that makes the coffee) is up to.

But I had recently put something in my cart, and noticed that the usual remarks about how much to add to my cart to qualify for free shipping didn’t add up to what it usually did.

I knew that a few years ago Amazon had upped its minimum purchase for free shipping from $25 to $35. But I had missed that they had recently (and quietly) upped it even further to $50.

Now, at first, needing to spend $50 to get free shipping sounds extortionate, but that’s only because we’ve been used to less for so long. And I did a quick survey of some retailers, and saw that $50 is about the standard. REI and Walmart require the same amount, while Overstock and Home Depot are near enough with $45. Only Target and Bed Bath and Beyond came in with $25. Every other place I looked at had a higher minimum.

Nothing against Amazon of course. That’s how companies work. They start out inexpensive to get you to be a customer, then they slowly (frog-and-pot-like) raise prices hoping you won’t notice. And let’s be honest, nothing is truly free, even shipping. Someone needs to pay for it, and it’s probably going to be you.

Plus, to Amazon’s credit, books now have a $25 minimum (again) for free shipping, which is certainly a positive development.

Amazon, however, has other tricks up its sleeve. Their real goal, so far as I (and others) can tell, seems to be to entice people to sign up for their Amazon Prime service.

For those who don’t know, Amazon Prime is a yearly subscription that grants you the following benefits:

  • Free two-day shipping
  • Free streaming movies and music
  • Free photo storage
  • Access to many e-books

Amazon Prime is big business. At a reasonable guess of 54 million subscribers in the U.S. alone, that’s 5.3 billion dollars a year Amazon reaps in Prime fees alone.

It’s usually the free, fast shipping that everyone wants. But is it worth the cost?

Adventures in e-commerce

I just put a contact juggling ball in my cart at Amazon (what, don’t you have one too?).

I edited out the credit card offer, thus the blank space.

I edited out the credit card offer, thus the blank space.

At $24.95, it says I need to add $24.05 to my cart to qualify for “FREE Shipping”. Failing that, shipping will cost a minimum of $6.18 and take about a week. (Other options are two-day and one-day shipping, with costs of $11.49 and $22.99 respectively.)

Notice the push toward signing up for Amazon Prime.

Hint: it’s not really FREE.

Gosh, they are all but screaming to have me sign up for Prime. And a good rule of thumb is that if a company wants you to do something really badly, it’s probably for their benefit and not yours.

Estimating costs

Trying to find an average cost for shipping is effectively impossible. Different prices, different destinations, and the occasional random item that has free shipping for no apparent reason makes it impossible.

Nonetheless, we can do some estimating. If you assume that the average cost is $6-$10 per item, we can assume that it would take you ordering 10-17 items per year to break even with the amount of money you’d pay for Prime. Otherwise, you’re just giving money to Amazon. (Which appreciates it, but doesn’t need it.)

If you are a video streamer, and would be paying for some other service, then you’d probably be paying about $99 per year minimum for that. (Netflix appears to be $108 per year.) If you stream music too, and would otherwise be paying for some other service, that’s around $120 a year. So points for Prime here if you do streaming.

In total, $99 a year is not an egregious cost for what you could get.

Beware hidden costs

Nonetheless, I wouldn’t recommend Amazon Prime.

One issue I have is that you pay in advance for benefits that you may or may not take advantage of. What if you only decide to order a few things on Amazon? Did you just fork over a Benjamin because of that word “FREE”? (The word is always stylized like that; Amazon ain’t no fool.)

But of course, that’s not what happens. When you purchase a subscription like Amazon Prime, you are going to divert your spending from other places. This is because of the induced spending effect when you purchase something in advance. “I’ve bought this subscription, so I might as well make the best use of it.” This may cause you to buy things on Amazon that you wouldn’t otherwise have bought. You can become a less-informed and less-empowered shopper if you favor a certain retailer over another.

But okay, I can grant that if you’re in the market for a video/music streaming service, then you’d be paying that much anyway, and the “FREE” shipping bonus is just a perk.

But for me, I prefer to feel like an un-tethered customer, one that can take my business anywhere I choose, without having to make good on a fee I’ve already paid. Even if it means not having “FREE” shipping.

I can just take my contact juggling ball and leave.

But enough about me. Do you use Amazon Prime? How much value do you get from it?

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

I offer a free phone consultation to anyone who is interested in changing their financial narrative. Are you ready? Click here for details.
Mike Pumphrey
Posted on April 4, 2016
  • Heidi

    What about sharing the subscription with others? My immediate family (there are four of us in three separate households) shares the same Prime subscription, all ordering things with different credit cards (and viewing videos on multiple devices) as well as having packages sent to various addresses. As far as I can tell Amazon doesn’t seem to care, and this seems like it could perhaps change the overall equation of value… Just a thought!

    • Interesting! I guess I didn’t realize that Prime was that easy to share. I mean, it’s definitely against the terms of service (just like how you aren’t allowed to share your WiFi signal with your next door neighbors) but if you go in with people you trust, that at least eases the sting of the fee. And perhaps with less buy-in, one would be less pressured to spend money at Amazon.

      Either way, if one has a Prime subscription, I think it’s at least worth asking oneself from time to time if one is buying from Amazon because they have the best deal, or just because one gets fast/free shipping. And it also might be worth assessing how much value (monetary or non-monetary) one has gotten from it in a given year. It might be worth it! (Or it might not…) Thanks for the thought!

  • mpinard

    I know I am guilty of induced spending, when I spend half an hour tinkering with adding things from my wishlist to make it as close to $25 as I can… the big benefits for me are the central availability of most everything I’m looking for on Amazon, and the linked wishlists, where I store ideas and guilty pleasure desires (yeah, romance novels, I said it). That said, it doesn’t stop me from shopping at local indie bookstores, but they often don’t have the thing I want within the same timeframe.
    Also a thought: I guess I am using ‘induced spending’ in a healthy way to exercise at the gym then, since my money is tied up there, “I might as well get the use out of it” ? Ha! Take that, marketing psychology! 😉