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August 01, 2007

Should Direct Response Radio Advertisers Follow Amazon's Example?

According to recent news reports, Amazon.com owes its impressive financial results of late to ... free shipping.

Could this be the next big offer in direct response?

Well, not exactly. Before you rush out and execute a "free shipping" offer, take a closer look at the economics. We can take a few hints from the things Amazon's CEO Bezos reveals in this article. First, he doesn't exactly confirm that the recent results are due to free shipping. What he does indicate, however, is that free shipping and their other product "Amazon Prime" (which essentially caps the customer's annual shipping costs) might be serving as excellent customer retention devices. It seems that once people sign up for Amazon Prime, they shop more. How perfect.

Here's how I'd put the picture together. Free shipping helps acquire new customers who are sensitive to shipping-cost. Once they're acquired, those customers are likely to buy the Amazon Prime product because it's targeted precisely at their primary fear about shopping online - that they'll pay too much in shipping costs. Then, once they buy Amazon Prime - which entails pre-paying for unlimited yearly shipping costs - their perspective becomes "I need to get the most out of this" and they shop at Amazon more than they otherwise would.

Now, let's look at the financial implications for Amazon. Amazon has a negative financial hit for the free shipping program. That's an investment in customer acquisition, which was demonstrated in Amazon's financial performance when they first introduced free shipping. Then, as those customers are converted into Prime and then begin to shop more, Amazon starts to see the return on that initial customer acquisition investment. That is exactly what we are seeing in the recent stellar financial results everybody is talking about.

So, back to the original question. Should direct response advertisers mimic Amazon's tactics? Yes and no. Yes, if you a) have the cash to invest in free shipping or any other customer acquisition element, and b) you're in business for the long term - that is, you have a customer retention plan and therefore a program like Prime is very relevant to your customers.

Posted by Jeff Small at 10:24 AM | Permalink