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Author: TMFJeff Big funky green star, 20000 posts Top Recommended Fools Old School Fool CAPS All Star SC1 Red Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5847  
Subject: Amazon Discussion Date: 6/28/2000 6:48 PM
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I spoke with Russ Grandinetti, Amazon's Treasurer, for about an hour today and in that time I was able to ask several of your questions, including "How is it calculated that books are profitable?"

The company associates all sales activity in the business with the costs that are incurred alongside those sales, so that managers can correctly allocate resources in the business. (Without an accurate measure of how each division is doing financially, managing the divisions would be like sailing blind at night; and realistically it's not likely that success could be achieved in each division.)

About 75% of all of the costs of the company can be and are directly connected to a specific product line; of course, the cost of goods sold is applied to each product sold, and then the costs of the distribution centers and the fixed and variable costs of each shipment for each division are calculated as closely as possible and assigned to each product line. Also, specific fixed overhead and variable costs are appropriately assigned to each product line.

Then, the company uses its best estimate on General & Administrative costs (if 1/4 of sales are books, for example, logically at least 1/4 of G&A costs will be credited to books).

So, every single cost that can be allocated is allocated directly to each product line (fulfillment costs, marketing costs, distribution, tech development costs, even hardware costs -- which can be based on page views); and then they allocate anything that you can't apply directly across all the product lines (an example may be the spreading of many or most G&A expenses over all product lines, based on sales in each).

To be critical, this seems to mean that the more product lines you have, the more chance you could have of making some of the older ones profitable by reducing this G&A cost because the cost is divided by many (new) product lines (even if only fractionally). (This is probably true of fixed cost allocation, too.) On the flipside, this also means, by the math, that each new product line is less expensive or costly to launch and manage in regards to G&A -- a situation which indeed was stated in the conversation. Each new product line should, on average, be less costly to open and ramp more quickly to profitability.

By allocating costs as accurately as possible, they can measure how each division is performing. If they weren't able to measure this accurately, they'd be in trouble. It'd be like The Gap not knowing which clothes are selling well and which aren't, and thus not knowing how or where to spend resources to find success.

As for why these specific numbers aren't shared in public, there isn't really an answer other than for competitive reasons. I asked if there are plans to share these numbers anytime soon, but there wasn't a certain answer to that (so probably not).

Of course, I'll provide all of the details of the discussion in a Rule Breaker column as soon as possible.

If you haven't seen the press releases about the comments from Bezos today, see those, too (hit the news link above). They reiterate how Amazon won't discuss overall profitability.

Have a good night,

Jeff

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