February 28, 2005, 12:00 AM

Amazon’s new twist on free shipping

At the end of January, Amazon rolled out Amazon.com Prime membership. For $79 a year, Amazon Prime members get free two-day shipping on all orders and if that’s still not fast enough, they can get overnight delivery for $3.99 on orders received until 6:30 p.m. Eastern time.

In the online retailing world, Amazon.com Inc. has traditionally set the pace on free shipping. It just lowered the bar again.

At the end of January, Amazon rolled out Amazon.com Prime membership. For $79 a year, Amazon Prime members get free two-day shipping on all orders and if that`s still not fast enough, they can get overnight delivery for $3.99 on orders received until 6:30 p.m. Eastern time.

Customers do not need to make a minimum purchase to qualify and they do not need to consolidate orders. Up to four persons living in the same household can take advantage of the Prime membership benefits.

The offer ups Amazon`s current deal--widely copied, usually with modifications that suit each retailer--of free ground shipping to a single address on orders of $25 or more. That deal, however, requires consolidated shipping, usually meaning that the entire order must be assembled before it leaves the warehouse.

Amazon won`t report details, but says that several thousand customers signed up in the first two weeks of the offer.

This offer, however, substantially changes Amazon`s dynamics, analysts say. "It opens up a whole new pricing dynamic," says Jim Crawford, vice president of Columbus, Ohio-based consultants Retail Forward Inc. "It lets them compete in price-sensitive categories because it takes shipping out of the equation."

Crawford adds that Amazon`s breadth of products and the loyalty and frequency of its shoppers will make the Prime membership offer difficult for others to replicate. "It only works for people who make a lot of purchases from a given retailer in the course of a year," he says. It could be copied by Wal-Mart, he says, but probably not by many other retailers. "Most other retailers don`t have the broad appeal and product selection that Amazon has," he says.

Nonetheless, the offer could have an effect on other online retailers, like just about everything else Amazon does. "This is big," says Heather Dougherty, retail analyst with Nielsen/NetRatings. "Other retailers will really be watching this."

Crawford likens the deal to a warehouse club, where consumers pay a membership fee, then feel compelled to shop there to get their money`s worth. "For customers who subscribe, it radically increases the stickiness of Amazon," he says.

Some think, though, that a membership like this might be a tough sell to a broad audience, especially since potential members will have to weigh the cost of joining against anticipated shipping costs of a year`s worth of purchases at Amazon. "Any time you ask consumers to do excess mathematics, it gets complicated," says Jim Okamura, Chicago-based senior partner with retail consultants J.C. Williams Group. "And this is an offer you`ll have to figure out."

Amazon already figures it will cost the company in the short run. Indeed, the announcement of the membership program came with a warning from CEO Jeff Bezos that Amazon expects the membership plan will cost Amazon at first. But Amazon clearly is banking on the long-term benefit of customer loyalty.

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