Ready, Fire, Aim! - Mihail's Public Blog: Amazon plays the volume game. Successfully.

Thursday, October 24, 2002

Amazon plays the volume game. Successfully.

More on Amazon's favorable revenue numbers at the close of its last quarter in this Wall Street Journal story (subscription required):

Yet Amazon said it would continue the $25 offer, which it previously described as a test, at least through the holidays. Free shipping is costly for Amazon, which still must pay freight companies to deliver orders: The company said it had a loss of $10 million on shipping in the third quarter, compared with a $2 million loss a year earlier. The severity of the loss was lessened because free shipping gives Amazon new opportunities for cost savings, since customers agree to wait longer to receive their orders, the company said.

Amazon also has a lucrative "marketplace" business through which it allows third parties to sell new and used goods on its Web pages. The commissions it collects from such sales are small relative to the revenue from new products Amazon sells from its warehouses, but the commissions are mostly profit, helping to offset losses elsewhere in its retail business. Amazon said 23% of the units it sold in the North America, including everything from books to electronics, were third party transactions, up from 16% a year ago.

The challenge for Amazon, with a history of steep losses, remains turning discount driven sales into long term profit. But analysts believe the company can reap profits by generating high sales volume, even if its profit margin is slim on most orders. "They're playing the volume game," said Jeetil Patel, an analyst at Deutsche Bank Alex. Brown. "The free shipping initiative worked in their favor."

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