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To Prime or not to Prime?
Note: You can use any financial calculator to do this problem, but if you want the BEST, you can
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THE SCENARIO
It's the end of the year, and for most people in America (and lots of other places), that means buying gifts for loved ones. And for many of us, our loved ones don't live super-close to us, so that means buying things online. And if you're anything like me, buying things online means Amazon.com.
If you've used Amazon, you're probably aware that they offer a service called 'Amazon Prime', which gives you a
whole lot of things like access to TV shows, movies, music, and eBooks. But arguably the
main thing it does is give you free 2-day shipping on things you buy on Amazon, with no minimum purchase amount. If you don't have Amazon Prime, you can get free 5-day shipping on most orders above a certain dollar amount ($35 last I checked), but with Prime, if you choose a slower shipping option, they'll generally offer you some kind of incentive like a $5 Prime Pantry credit, $1 off an MP3 song or album, or other things like that.
Lest you think this is an advertisement for Amazon Prime (it's not - it's a testimonial at most, as I have Prime and like it quite a lot), let's get into evaluating whether buying a Prime membership makes sense.
I'll be using several assumptions in this scenario.
- I'm going to assume that having Prime doesn't change your buying habits (it certainly can).
- I'm going to assign a value of zero to the free movies, TV shows, music, and eBooks, and to the (optional, with slower shipping options) Amazon.com credits you can get with Prime.
- I'm going to assume that I don't always order items from Amazon beyond the free-slow-shipping order threshold when I don't have Prime.
- I'm going to assume that I incur shipping costs from Amazon on a regular and uniform basis; that is, no month costs more or less than any other month throughout the year.
As of this writing, Amazon Prime costs $99 per year.
The question: If I want to make 24% on my money, how much would I need to save on shipping each month to justify the $99 annual price tag on Amazon Prime?
THE SOLUTION
This one is fairly straightforward.
First things first, make sure the calculator is using 12 Payments per Year.
N: 12 (Amazon Prime memberships last for one year)
I/YR: 24 (I'm trying to make 24% on my money)
PV: -99 (Amazon Prime costs $99 per year)
PMT: (this is what I'm trying to find)
FV: 0
If I want to make 24% on my money, I'd need to save $9.36 per month in shipping costs.
What do you think? Do you have Amazon Prime? Do you consider it worth it? Or do you have any other tips for making online shopping less expensive that we can all benefit from? Let us know in the comments!
