You can buy an iPod nano on Apple, Best Buy, etc. for about $149. Amazon sells it for $134. That’s probably cost price. It turns out that Amazon can sell almost everything at cost price and still make a product because of volume. It’s all down to the Negative Operating Cycle. Amazon turns over its inventory every 20 days whereas Best Buy takes 74 days. Standard retail term payments take 45 days. So Best Buy is in debt between day 45 and day 74. Amazon, on the other hand, are sitting on cash between day 20 and day 45. In that time, they can invest that money. That’s where their profit comes from.
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I don't think 50 days of interest is enough to explain an 11% price difference. The interest you earn in 50 days is less than 1%.
Jesse Ruderman - 22nd June 2009 17:40 - #
Leonid - 22nd June 2009 18:02 - #
Most large retail business make their money in this way; supermarkets are a prime example.
When you factor in loss leaders and the way such large firms can bully all (not just small) suppliers into lower prices, is it any wonder firms like Tesco in the UK have such gargantuan turnovers and profits.
Once you know about this bit of financial engineering, you see it everywhere.
It's the same principle which makes insurance work. You don't need to make money on underwriting; you just need to not lose enough money on underwriting so that it's cheaper, over the term of the policies you write, than conventional financing. If you pull that off - and if you're well-capitalised enough to ride out the big short-term hits - then you can reinvest the float elsewhere and pocket the difference.
Basically, insurers sell variance swaps; and as a result Warren Buffett's one of the richest guys in the world.
(It's also why startups who can self-fund out of prepayments are in a really good position - they're effectively getting free credit.)
Andrew Walkingshaw - 22nd June 2009 18:30 - #
Jesse,
You don't need to explain an 11% price difference. The idea is this:
1. You buy an item for $100, invoice due in 45 days
2. You sell me that item AT COST, i.e. $100. I pay you.
3. You invest my $100 for the time that remains until your invoice is due. Low $$ amounts, but free money.
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Leonid,
I believe they're talking about unit cost TO amazon, not the cost of production.
Neil - 23rd June 2009 07:54 - #
I agree that Amazon is not selling at cost. Their cost structure obviously is very different from BB, but they're making money on every unit.
Ted Hurlbut - 24th June 2009 00:24 - #
Also, Amazon is not using traditional banks to make up this interest. Notice that Jared stated that they "invest that money". They don't put it into a bank account to accrue interest, they invest. Big difference.
(And I also agree that Amazon is making something on everything they sell, they aren't selling at exact cost.)
Colin Devroe - 1st July 2009 18:15 - #