Amazon is selling more than ever, but making less than half its normal profit. Amazon reported a 58% drop in quarterly profits, causing its stock to drop 12% percent in after hours trading last night. Amazon opened today at $28.76 and continues to fall steadily($26.44 at 11PST).

The drop was due to increased operating costs from increased operating costs and competition-induced promotions. Rumored to be the most costly program is Amazon Prime, released in February 2005, which gives customers unlimited two day shipping for $79 a year. Amazon has declined to state exactly how much the program has cost them, but estimates that it has saved customers upwards of $500 million on shipping thus far.

It is argued that programs like Amazon Prime increase revenues, but Amazon’s total operating costs have increased 34%. What is the point of selling more and making less than half of what you used to? The point of promotion and super saving programs is to make you more money, not less.

There are other ways to increase sales and keep customers loyal. Amazon is thinking ahead with its recently announced plan to start a video downloading service. I hope the technology costs associated with starting the video download service were part of the 2nd quarter earnings statement and won’t show up next quarter.

Amazon’s site itself is one of the best out there, but it could use a little improvement in terms of cluttering and search results. Amazon just needs to think harder than the loss leader technique. Loss leaders may increase customer spending, but we will see if unlimited shipping proves to be economically optimal.

₁ Amazon stats are from NYTimes article.
₂ Amazon’s stock price acquired from Google.com