Amazon is really rubbing it in. Notorious for its willingness to lose money to drive ever-increasing sales, the company said Wednesday that it is now giving customers the option to donate 0.5 percent of the price of many purchases to charity through a new project called Amazon Smile.
The process is pretty easy: Customers go to smile.amazon.com and choose a charity. Amazon (AMZN) suggests a few, such as the American Red Cross and the Nature Conservancy. From that point on, the donations are sent automatically. There isn’t a cap on how much money Amazon will send to charities, but the program does exclude digital items such as Kindle books and recurring Subscribe-and-Save purchases or subscription renewals. “Nearly all physical products are eligible,” says a company spokesperson via e-mail.
This cuts into Amazon’s profit margins, of course, or it would if it had them. The company lost 9¢ per share in its most recent quarter, while increasing 24 percent in sales over the previous year. Once Amazon explained this to investors, its stock price shot up. Call it the Amazon Paradox (as my colleague Brad Stone did at the time).
Amazon does get some direct benefit from Smile, because the company—not its customers—gets the tax advantages of the charitable donations. But the basic strategy is the same as the company has always employed. Do things to draw more customers, even if it means the margins from each transaction get slimmer.
This has led to questions whether Amazon can ever become consistently profitable. Is its sales growth completely reliant on its money-losing ways? Or is it playing a very long game by pumping its profit into long-term investments? Eugene Wei, a former Amazon employee who wrote an interesting analysis of the company’s business model on his personal blog last week, thinks it’s the latter. In many cases, Amazon sales categories are very profitable, but it has chosen to sink everything back into investment, largely into new fulfillment centers. Those investments lead to new sales. Lather, rinse, repeat.
In the same way that customers buy more when they’re offered free shipping, people may spend more when they know a chunk of it is going to charity. That means smaller profits immediately, but Amazon thinks it will translate into bigger ones in the future. Eventually we’ll see if it’s right.
