Amazon Prime members gain several membership advantages, but one of the greatest is free shipping. For only $99 per year, you get free shipping and rapid delivery — and if you use Amazon even semi-regularly, you will save a bundle on shipping charges compared to the $99 membership. That begs the question: how can Amazon afford free shipping with Prime membership at $99? The price was raised from $79 to $99 last year, but shipping costs are not the fundamental reason why.
It is not an issue of volume; that actually aggravates the situation. Logically, one of the main points of Amazon Prime is to get people to spend more on Amazon, thus, a successful Prime program actually adds to Amazon's overall shipping costs.
One of the main mechanisms that makes free shipping feasible is that merchants are paying fees on the back end that you do not see as a consumer. Presumably, merchants have already priced those fees into their products.
As you look around through Amazon, notice the small indicator that says "Fulfilled By Amazon." Merchants pay significant fees for the privilege of participating in this "FBA" program, including various handling and packing fees. The real key is for inventory storage.
For Amazon to provide the quick turnaround that customers demand, they have to have inventory that is both sufficient and efficient — and that is where Amazon excels. Not only is Amazon good at handling inventory, they are good at pricing inventory fees to balance the needs between Amazon, consumers, and merchants.
Inventory fees are charged by the square footage that merchant's items take up, with seasonal and product related factors figured in to maximize fee revenue. For example, the standard inventory charge is $0.51 per cubic foot of volume in the first nine months of the year, but afterwards, in anticipation of the holiday season, the rates go up to $0.68 per cubic foot. That may not sound like much, but keep in mind that Amazon has 103 million square feet of warehouse (aka fulfillment center) space. Multiply by the ceiling height to get some idea of the full volume (presumably, warehouses have at least 10-foot ceilings and are probably much higher).
Long-term storage fees for items that sit in the Amazon fulfillment centers for between six months and a year take up $11.25 per square foot; one year or more costs $22.50 per cubic foot. Returning or disposing of inventory incurs yet another set of fees. This strategy forces...