Selling everything from pink plush tonsils to pocket-sized cannons for your desk, Amazon is an online retailer like no other. The company has earned a reputation for offering competitive prices and fast shipping, but all that convenience comes with a high price tag for the sales giant.
Although profits rose once again in the first quarter of 2017, a Business Insider article revealed that revenue came in at $43.7 billion instead of the $44.68 billion analysts anticipated. In order to continue offering speedy shipping and other perks customers have come to expect, the company finds many ways to boost its income.
That doesn't mean you can't be savvy when you shop the website. Find out how to save money on Amazon products by avoiding the tricks the retailer uses to make you overspend.
Amazon uses a highly sophisticated algorithm to recommend the right products to the right customers, at just the right times. The company has access to data that allows it to analyze behavior from customers and use the information to recommend products to other shoppers with similar profiles.
According to Vadim Bichutskiy, director of data science at Innovizo, Amazon has pioneered a data-driven strategy for cross-selling and upselling.
"As an avid reader, I buy lots of books on Amazon, and on many occasions I have taken advantage of its 'Frequently Bought Together' and 'Customers Who Bought This Item Also Bought' features," said Bichutskiy. "Not only did I enjoy the books, but I never would have known about them without these recommendations."
In fact, Amazon attributes 35 percent of its revenue to cross-selling, and that money is coming out of your pocket.
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Free Shipping Offers
Amazon offers customers a few different ways to score lightning-fast shipping. You can pay $99 a year for an Amazon Prime membership, which gets you free, two-day shipping on most items and free, two-hour delivery in certain areas. If you don't want to pay for an Amazon Prime membership, you can spend at least $25 on books — or $35 on other qualified items — for free shipping.
However, free shipping isn't free for Amazon, and the company has to make up its losses somehow. The goal of the free shipping offers is to incentivize customers to pay extra for Prime Memberships or get them to increase the number of items in their carts to hit the minimum. And the strategy works. Revenue from these incentives offsets Amazon's annual shipping costs. Still, GeekWire estimates that Amazon lost $7.2 billion on shipping costs in 2016 alone.
Amazon Prime Memberships
Amazon Prime is a customer loyalty program that was originally designed to get shoppers to spend more. According to a report by the market research firm Consumer Intelligence Research Partners (CIRP), as of April 2017, 80 million people in the U.S. had Amazon Prime memberships. As a result, they can take advantage of incentives like free expedited shipping, same-day delivery in certain areas, unlimited video and music streaming, early access to lightning deals, access to the Kindle Owners' Lending Library and discounts on diapers, video games and more.
Once you pay for an Amazon Prime membership, you will likely stop shopping at other stores in order to take advantage of all the benefits. According to the latest CIRP report, Amazon Prime members spend a jaw-dropping $1,300 a year with the retail giant, compared to non-Prime shoppers, who spend just $700 a year.
Still, this program isn't a direct money-maker for the online retailer. Amazon Prime has become a tool for acquiring new customers and building loyalty, so the company can make money off members in other ways, like video streaming and cross-selling, according to Fortune.
Prime Instant Video
Amazon Prime members have access to Prime Video, which lets them stream a number of popular TV shows and movies. However, Prime Video doesn't actually make the company money.
Amazon has discovered that Prime members who use the free video streaming service are 10 times as likely to rent or buy movies from Prime Video as non-Prime members. Once customers get into the habit of streaming free videos, Amazon has a chance to sell them on renting or buying videos that aren't available for free. If you're looking to save money on Amazon, try to stick to those titles the service offers for free, including shows like "The Americans" and "Catastrophe" and movies such as "Manchester by the Sea" and "Creed."
Amazon actually owns the patent for 1-Click ordering, which has generated billions in revenue for the retail giant. Once customers store their credit card and shipping information on the servers, they can simply click once to place orders without going through the checkout process.
This frictionless ordering system is another way in which Amazon disconnects customers from how much they are actually spending and encourages impulse buying.
As of June 2016 Amazon offered more than 150 "Dash Buttons," which allow customers to reorder common household items like detergent, paper towels, diapers and pet supplies with the click of a button. Dash Buttons connect to WiFi and can be placed anywhere in your home, so you don't need to get on a computer or smartphone to reorder — just press the button, and you're done.
Dash Buttons might seem like a convenient service offering, but many people think they are just another Amazon trick to disconnect customers from the truth of their spending habits. And because Amazon limits the brands offered through Dash Buttons, customers aren't necessarily getting the best rates on items they need.
The customer pays a price for convenience, and Amazon reaps the rewards.
The next time you see a promotion for an Amazon Kindle, think twice before buying, as the "deal" might actually cost you in the long run. According to a 2016 report by CIRP, Kindle owners spend an average of $1,450 per year at Amazon, compared to $725 for customers who don't own Kindles.
In a press release, CIRP co-founder Mike Levin said, "Similar to Amazon Prime members, Amazon Kindle owners are better customers. They also shop more frequently and buy more expensive items on average."
Prime Day Sales
Amazon's Prime Day is a 24-hour event during which members enjoy access to a wide array of products at below-average prices. To lure more customers into taking advantage of this promotion, Amazon offers a free, 30-day Prime membership, so anyone can participate in the event. By selling more Amazon Prime memberships, Amazon can increase its cross-selling opportunities and profits.
According to CNBC.com, 2016's Amazon Prime Day was the biggest one yet, with worldwide orders climbing 60 percent and U.S. orders rising more than 50 percent. If you're looking to keep your Amazon spending down, you might want to avoid participating in 2017's sales event.
Amazon's Lightning Deals can be found throughout the website and on the Gold Box page. These deals are limited to one per customer and usually have very short expiration dates. Along with making the offers time sensitive, Amazon creates a sense of urgency by displaying status bars that show the percentage of products already in shoppers' carts and the percentage still available. If you're looking to save money on Amazon, you might want to steer clear of this section of the site and avoid the temptation to buy on impulse.
Amazon is notoriously reticent about how much revenue it gains off these deals, but the company tends to double-down on the strategy around certain holidays. For example, Amazon doubled its lightning deals to 30,000 during the 2015 holiday season, and customers jumped at the chance to score flash deals on electronics, TVs, jewelry and toys.
Amazon Prime members were also treated to 30-minute-early access to Lightning Deals. This discount is yet another way that the company can profit off its memberships.
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Amazon sales jumped 23 percent to $35.7 billion in the first quarter of 2017, according to CNBC. And these profits were due in no small part to Amazon capitalizing on "the internet of things," with products like the in-home personal assistant, Echo, and a smaller version known as the Echo Dot.
Costing about $180 for the original version and $50 for the compact model, Echo is a wireless, voice-operated speaker that features artificial intelligence. It's always ready to listen and can play music and games, set alarms, perform math equations and look up facts online. Additionally, Echo allows customers to purchase items from the company's website without the use of a computer. Echo even has a friendly persona named Alexa, so you feel less like you're interacting with a company and more like you're shopping with a friend.
According to CIRP, Amazon has sold 5.1 million Echo devices nationally since 2014.
Amazon Prime Now
The latest addition to Amazon's speedy delivery options, Prime Now offers items in two hours or less. This service is free for Prime members but limited to certain cities and zip codes. Prime Now is just another way in which Amazon promotes its Prime memberships and keeps customers from spending money at other retailers.
Amazon Prime members can use Prime Now to get groceries, household items and office supplies delivered right to their doors. And the company's investment in faster delivery services has paid off. In 2016, Amazon CEO Jeff Bezos said he will continue to invest in new warehouses and data centers, as well as additional services for Prime members.
It's become so easy to order products through Amazon that most customers don't bother to find out where their merchandise is actually coming from. Instead of housing products in expensive warehouses and losing money on free shipping, Amazon has started employing third-party sellers.
Amazon's Marketplace allows smaller businesses to sell to millions of shoppers under the Amazon umbrella. According to CNBC, Amazon shipped 50 percent more items through third-party sellers during the 2016 holiday season than the previous year.
Meanwhile, the company just sits back, relaxes and collects your money.