SERVICE COMPANY INSIGHT Giving Away the Store? In an earlier chapter, we discussed Amazon's incredible growth. However, some analysts have questioned whether some of the methods that Amazon uses to increase its sales make good business sense. For example, a few years ago, Amazon initiated a "Prime" free-shipping sub- scription program. For a $79 fee per year, Amazon's customers get free shipping on as many goods as they want to buy. At the time, CEO Jeff Bezos promised that the program would be costly in the short-term but benefit the company in the long-term. Six years later, it was true that Amazon's sales had grown considerably. It was also estimated that its Prime customers buy two to three times as much as non-Prime customers. But, its shipping costs rose from 2.8% of sales to 4% of sales, which is remarkably similar to the drop in its gross margin from 24% to 22.3%. Perhaps even less easy to justify is a proposal by Mr. Bezos to start providing a free Internet movie-streaming service to Amazon's Prime customers. Perhaps some incremental analysis is in order? Source: Martin Peers, "Amazon's Prime Numbers," Wall Street Journal Online (February 3, 2011) What are the relevant revenues and costs that Amazon should consider relative to the decision whether to offer the Prime free-shipping subscription