How Does Amazon Afford Free One-Day Shipping?

How Does Amazon Afford Free One-Day Shipping?

According to an article by Recode, Amazon started offering free one day shipping for many, if not most, of the products they sell on their website. This move allowed Amazon Prime members to buy products as low as a $1 and have them delivered to their homes the next day for free.

Some might wonder how Amazon makes one-day delivery possible, and the reason for that is due to the number of warehouses Amazon has across the United States. According to Amazon’s official blog, they have 110 fulfillment centers, 40 package sortation centers, 100 delivery stations, and 20 air gateways, making one-day deliveries, or even same-day deliveries, possible for most of their customers within the United States.

One of the most obvious reasons Amazon is offering a one-day shipping for their products is to crush the competition, especially Walmart who also started offering one-day shipping for their customers, but the caveat is that the customer’s order has to be at least $35 to qualify for one-day shipping. That being said, Amazon customers have to be Prime members, which cost $119 a year, to be able to place orders with one-day shipping. In a rapid response to Walmart’s one-day shipping, Amazon posted a Tweet on their official Amazon News account reminding customers of their one-day and same-day free shipping options that is available within most of the United States, comparing it to Walmart’s one-day shipping that is currently only available in few cities. (A link to the tweet can be found here: https://bit.ly/2PAMeW1)

One of the other reasons, or goals, behind Amazon’s free one-day shipping is to gain more customers, which in return will allow them to have larger market share. Currently, one-day free shipping is only available for Prime customers, regular customers who wish you have their order delivered in one-day have to pay extra shipping charges to have it delivered within a day. This move will encourage those non-prime customers to switch to Prime, and of course pay the $119 membership fee, in order to get free one-day shipping, in addition to other benefits offered by the Prime membership.

I believe that the main idea behind Amazon offering free One-Day shipping, despite the possibility of losing money on those $1 orders, is that they are trying to reach economies of scale. Building those warehouses and distribution centers across the United States, the massive distribution networks, relying on their own delivery services instead of UPS, FedEx, and USPS, as well as their lower prices will increase the number of orders, which in return will eventually increase their profits and yield large margins compared to other competitors such as Walmart, and eventually reaching economies of scale.

Looking at the graph below, obtained from this article by Business Insider https://bit.ly/2qc6sus, it seems that Amazon net sales are growing every quarter compared to the same quarter the year before, peaking at Q4 which is usually when most people do their Christmas shopping. I will be curious to see the numbers of Q3 and Q4 of this year after Amazon offered the free one-day shipping.

Amazon Graph

It is worth mentioning that Amazon not only offer free one-day shipping to their Prime customers, but also same day shipping if they placed their orders before a certain time, free Two-Hour grocery delivery from Whole Foods, Free In-Car Delivery, Free In-Home Delivery, and much more. More info on that can be found here: https://amzn.to/34kvJSc. Also, Amazon provides their customers with an option to get their order at a later day, called Free No-Rush Shipping, in exchange of a $1 credit towards their digital store.

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