Amazon's pledge to offer free next-day shipping for its most loyal shoppers is proving an expensive promise.
When Amazon announced one-day shipping for Prime members in April, it said that it expected to spend $800 million to get this new service off the ground but in the quarterly results that followed, Amazon CFO Brian Olsavsky said that it wound up costing more than this.
And this shows no signs of slowing down. On Thursday, Amazon reported its third-quarter earnings results and, which showed that its overall shipping costs had increased by 46% from this time last year, soaring to $9.6 billion.
Olsavsky told investors in a call after earnings were released that he's expecting to incur more expenses during the upcoming holiday season. Because of this, Amazon has factored a $1.5 billion penalty from the cost of one-day shipping into its fourth-quarter guidance.
This number includes the cost of transportation, expanding its transportation capacity, and moving inventory closer, he said; Amazon has been investing heavily in Amazon's last-mile network to support this delivery service.
Olsavsky said that the investment was paying, however, and that this was reflected in revenue growth in the quarter; revenues were up 24% to $70 billion from the same quarter last year. Plus, executives say it's resonating well with the customer.
"Customers love the transition of Prime from two days to one day — they've already ordered billions of items with free one-day delivery this year. It's a big investment, and it's the right long-term decision for customers," CEO Jeff said during the call on Thursday.
Bezos also said that the new service is better for the environment as these products are being shipped from fulfillment centers that are closer to the consumer. "It simply becomes impractical to use air or long ground routes," he said.