But many of those customers could be unprofitable Prime customers like me. Even though I pay the annual Prime membership fee, I return so many orders that I’m not convinced it covers my shipping costs. In the last two weeks alone, I’ve ordered and returned two items, meaning Amazon paid to ship the package four separate times and got no sale. As the costs of shipping rise, Amazon may find more and more of its customers similarly unprofitable.
This may be why Amazon seems to be coming up with more ways to get its customers and sellers to help subsidize the cost of free shipping. On Thursday, during the company’s quarterly earnings call, Amazon said it would raise the cost of annual Prime memberships to $119, from $99, effective May 11. The increase in costs comes as 100 million items are now available for two-day shipping, up from 20 million in 2014, said Brian Olsavsky, Amazon’s chief financial officer, on the call. In January, Amazon also raised seller fees for various apparel categories; it raised fees for book and video sellers last year.
Some analysts think that the rising cost of shipping is going to be a problem for Amazon down the road. After all, shipping is a “variable cost,” which means the more physical goods the company sells, the more it has to spend to mail them. (Fixed costs, by contrast, stay the same no matter how much a company sells or doesn’t sell.) “I see no end in sight for the escalating fulfillment costs for Amazon,” Robert Hetu, a research director with Gartner, wrote me in an email. “I see this as a tremendous risk for Amazon because at some point they will have to make it much more expensive to be a Prime member and at that point lose a major part of the value equation for the customer.”
The cost of shipping a package—not counting the expenses of moving it around in a warehouse and getting it ready for the post office—varies depending on the size of the package. Small items cost around $2 a package, while medium-sized boxes cost around $3 to $4, according to Vernon, the Bernstein analyst. It’s possible that Amazon recoups some of these costs because the company’s markup on items is higher than the cost of shipping. But these shipping costs are almost definitely going to get higher in the coming years. With unemployment low, carriers like FedEx and UPS will have to offer higher pay to attract new employees, Vernon says, and they could pass the costs of these higher wages onto Amazon and other e-commerce companies. The U.S. Postal Service, which delivers many of Amazon’s packages, could also raise rates: President Trump ordered the creation of a task force to study the beleaguered government agency, which he has repeatedly attacked on Twitter.
In a note last year, Vernon wrote that he expects shipping costs to grow 7 percent a year, a number that companies like Amazon are going to have to continue to absorb. “We think we are in the middle of the period of cost discovery when it comes to e-commerce, and that the market as a whole has underestimated how expensive the convenience of buying everything online will ultimately prove to be,” he wrote.