a break-even analysis of Amazon Prime

Recently for no readily apparent reason I've been hearing a lot from my friends about Amazon Prime — I blame synchronicity and/or the increasing yuppieness of my friends. (One friend described it as one of the three big technological advance that had significantly changed his life, on par with e-book readers and smartphones. Another friend thinks that breaking down the Amazon boxes for recycling on a weekly basis may be one of his son's chores when his son gets old enough, on par with doing dishes or taking out the trash. It seems to me that Amazon Prime is basically an early version of a matter compiler.)

It's an interesting program — pay Amazon $80 a year and receive free two-day shipping on everything you buy that is sold or fulfilled by Amazon.com. This means that Marketplace purchases are out, eg. used books, as are goods for which Amazon is just providing a web storefront for another company and that other company is doing the shipping themselves rather than relying on Amazon's fulfillment system. It's fairly easy to tell what's available through Prime (there's a prominent icon), and there are a couple Prime-only search engines available. But you are limited to giving money to Amazon, basically, so if you have issues with them, you're pretty much out.

That said, I've been finding myself using Amazon more and more lately. Since I live in a dense urban area, I can do a lot of my shopping locally, but I don't have a car, so if I want to buy things in bulk because I go through them fast enough — granola bars, for example — I have to either get in on a friend's Costco run or rent a Zipcar, which is hassle and expense that usually negates the advantage of buying in bulk. The same applies to most big-box stores — Ikea, Home Depot, Staples, etc. They're all only really accessible by car. (And when I'm buying big things I don't want to lug them back by hand anyway.) It's all much easier when these things show up at my front door. So I've been using Amazon for bulk purchases — big boxes of Clif bars, which are blood sugar-support in lab and usually breakfast, other different granola bars which make a good snack, a few pounds of crystallized ginger, that kind of thing. (The Clif bars I'm actually subscribed to — Amazon has a Subscribe-and-Save program, so every month two big boxes of them show up on my doorstep, and I get a discount and free shipping in the bargain. It's separate from Amazon Prime, so Prime wouldn't give me any advantage there, but when I was buying them a box at a time as I needed them, I sure wouldn't have turned it down.) So I've been considering getting an Amazon Prime membership, and in so considering, I wondered if anyone had done an analysis on what the break-even point was. How many orders do I have to make with Amazon in order for a Prime membership to cause me to spend net less money? It wouldn't surprise me if someone inside Amazon has done this analysis — in fact I'd be surprised if Amazon hasn't — but I couldn't find one with a decent amount of Googling, so I did my own. Here's what I came up with:

The easiest situation to figure this for is the straight-up equivalence — anything after this has complicating psychological factors that are hard to quantify and account for. Amazon Prime gives you free two-day shipping on all your Amazon purchases, so if in a year you make enough purchases with Amazon on which you choose two-day shipping for which the shipping charges are in sum equal to or greater than the cost of an Amazon Prime membership, you're better off having bought the Amazon Prime membership. The shipping rate is of course going to vary depending on how bulky or heavy or fragile or hazardous the item you're buying is, so I have to calculate the rate for my "standard purchase load", but having spent some time adding and removing things from my Amazon cart last night I've figured out that my average Amazon purchase would cost me $12 to ship with two-day shipping. So divide $80 by $12 and voila, I break even after seven Amazon purchases with two-day shipping.

(A complication I didn't account for: Amazon Prime gives you free two-day shipping and your items ship as soon as they're available,, which costs more, rather than grouped into as few shipments as possible, so if you would have purchased those items with two-day shipping and ship-as-soon-as-possible then you break even even faster. Also there's no minimum order for you to get the free shipping with Amazon Prime, but I don't usually have trouble with that.) I've easily made seven purchases from Amazon in the last six months, so Prime is obviously a good deal for me! Except I almost never choose two-day shipping, save maybe for Christmas or birthday gifts or the like. Lately I seem to be choosing standard shipping, which costs about $5 for my average purchase, so I'd need to make 16 purchases in a year on which I chose standard shipping in order to break even. I placed 13 orders in 2008, 15 in 2009, and I'm on track to make at least that many this year (not counting the Clif bar subscription), so it's still a pretty good deal for me!

(A complication I didn't account for: Amazon has started occasionally giving me free standard shipping. I don't know why, there's no explanation on the page or in the item description, my order history has no record of which orders it applied to, and I haven't checked my bank statements to see if they're actually charging me for shipping, but I'm not complaining. I assume it's because I've spent enough money with Amazon that they're willing to upgrade my shipping sometimes, which led to the question of just how much money have I spent with Amazon, and would I be better off with a Prime membership?)

Except well over half of the things I buy from Amazon are things that I want but don't need right away, eg. books I'm only going to donate to my local library, and so I take the free shipping option, knowing that the variance on delivery times for that is huge. (Sometimes I get free-shipping packages within three or four days; sometimes it takes up to two weeks.) If I'm willing to take the chance of waiting two weeks, free shipping is a great deal. With Amazon Prime I'd get those things faster, for sure, and sometimes I do realize a week in that I actually wanted that thing faster than free shipping got it to me, but here we're well into wishy-washy psychological territory. Would I in retrospect have paid for faster shipping on enough orders that I would have saved opportunity cost had I had a Prime membership? That's even quantifiable, but without having journaled it throughout the year I don't think I have any reliable way of backtracking to figure it out. So it's really hard for me to say whether Amazon Prime would actually be a net win for me.

Now, for full disclosure, I have started a Prime membership, though I'm still in the one month free trial period, and I didn't include any of the purchases I made after getting the Prime membership in the above data, on the chance that getting the Prime membership has changed my purchasing patterns somehow. I don't think so, but, y'know, remove or account for as many potential sources of error as possible. I got the membership because I'm a senior at MIT, absurdly hosed, and any time or stress I can save is hugely valuable to me if I'm going to graduate with my sanity intact (heh). Now, money is also a stressor, to be sure, and I'm mostly living off savings, so I can't afford to be profligate in my spending, but I know I've been stressing about being around stores at certain times when they're open to pick up things I need, and the ability to buy them at 4 AM in my pajamas and have them show up on my front doorstep within a few days is I think going to help a lot with that. It still doesn't work for things I need to try on or see in person, but hopefully I won't need too many of those things in the next two months anyway.

2 thoughts on “a break-even analysis of Amazon Prime”

  1. When I buy from amazon, I often try to group my purchases so that I can save on shipping. I don’t have a Prime membership, but I suspect that another advantage of membership for me would be the ability to do multiple orders (after forgetting to throw something else into my cart) without beating myself up over it.

  2. The big win for me (I was a Prime early adopter) has been the cheap overnight shipping for “oh god I need this book for this paper RIGHT NOW” or “I want a color laser printer. Tomorrow.” If you don’t have Prime, overnight shipping on a printer is not $4. Also the free shipping on the treadmill was pretty awesome.

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