In a sense, retailing has become an arms race, in which enhanced services are the weapons of mass customer satisfaction. The really big gun in this metaphor is shipping—a service that Amazon wields effectively to ensure its victory. By granting every Prime member free two-day shipping (or even faster delivery for some items), Amazon has redefined people’s basic expectations, and thus the requirements for virtually every company that hopes to sell products today.

Amazon’s Prime membership, which costs $119 annually, guarantees consumers added value in various ways, but the free shipping is likely the most widely recognized benefit. Whereas previously, in the days before Amazon, mail-order retailers could simply put their products in the mail, and consumers would wait patiently, the provision of free two-day shipping has radically altered consumers’ expectations. Due to the “Prime Effect,” Even tiny retailers have little choice but to offer rapid delivery, a service that is very expensive for the seller.

Many of these small retailers therefore rely on Amazon itself. Through the Amazon Marketplace, hundreds of thousands of independent retail operations rely on Amazon to help them fulfill orders. They pay Amazon a fixed shipping rate (based on size and weight dimensions), and then Amazon takes care of the rest. Although the costs are still substantial, they are much less than would be required to ship individual packages on their own, and the companies also can precisely predict what the costs will be in advance. Although these partners are not required to participate in the Prime program, if they do not, their offerings appear much farther down in the search results (or not at all, if customers limit their searches to Prime offerings). Evidence in turn indicates that they would need to reduce their prices by about 10 percent to attract the same level of sales that they can achieve by being part of the Prime offerings.

Amazon’s shipping practices also have exerted effects on retailers outside its site though. As they try to play catch-up and remain appealing, major competitors such as Walmart and Target are trying to find ways to enhance their ability to get products to consumers faster. Whereas Walmart is pursuing a model similar to Amazon’s, featuring strategically placed distribution centers, Target takes a different approach and ships most of its online orders from local stores themselves.

But in both cases, the retailers have a ways to go to achieve capabilities that can match Amazon’s shipping logistics. For years, the company has actively invested in finding and developing the best locations for its physical distribution centers. In particular, 25 sortation centers bundle goods according to their ultimate location destination, and 75 fulfillment centers pack up the boxes. Some of these warehouses exceed 1 million square feet—a massive brick-and-mortar resource for a company mostly associated with online channels.

Discussion Questions:

1. What is the “Prime Effect”?
2. How does the shift, from requiring customers to pay for shipping to free shipping in just two days, affect the financial ratios in the strategic profit model in Chapter 6?
3. How does two-day free shipping affect customer loyalty and customer lifetime value?
4. Does two-day free shipping sufficiently enhance customers’ perceptions of the overall level of customer service offered to determine whether they purchase from one retailer or another? Under what circumstances would you say yes? No?

 

Source: Christopher Mims, The Wall Street Journal, September 20, 2018