Why Amazon Just Gave Away $5 Million

NEW YORK (MainStreet) – Earlier this week Amazon launched the most popular daily deal in recent memory, offering $10 gift cards to its own site for $5 each. To no one’s surprise, the deal quickly sold out: An Amazon spokesperson tells us that the company sold 1 million deals in 17 hours and 11 minutes, which by our math comes out to 16 sales per second. That makes it one of the best-selling deals of all time, ranking among LivingSocial’s $10-for-$20 Whole Foods deal and Groupon’s $25-for-$50 Gap deal.

But even more interesting than the popularity of the deal is where it was sold. While a similarly-discounted Amazon gift card was sold last year on LivingSocial – in which Amazon is a big investor – this time around Amazon used its own deal service, Amazon Local. Amazon launched Local last summer, and by pushing such a high-profile deal it clearly hopes to catapult itself into becoming a more serious player in the space.

And that’s why it makes all the sense in the world for Amazon to essentially give away $5 million – which is what it essentially did by selling gift cards to its own site at a $5 discount.

“It’s a double customer-acquisition technique,” says Brad Wasz, the chief operating officer for CouponTrade, a gift card and daily deal reselling site. “It not only drives traffic to Amazon Local, but also back to Amazon.com.”

Wasz notes that last year’s Amazon gift card offer on LivingSocial served as an experiment, allowing the company to test its “breakage” on the cards – that is, how many people ultimately wound up redeeming them. That, combined with the company’s knowledge of average ticket prices (how much customers spend per purchase) and typical profit margins allowed Amazon to gauge how much (if any) loss it would take on another gift card deal. 

So even if Amazon does wind up taking a loss on the deal, it will be a lot less than $5 million once the company accounts for unredeemed gift cards and whatever profit it’s able to turn on the purchases made with the cards. Given that most people are going to spend a lot more than $10 when they actually come to Amazon – we’re guessing most will try to get to the $25 free shipping cutoff, at the very least – we wouldn’t be surprised if Amazon even wound up turning a profit when all is said and done.

Of course, whether Amazon will indeed be able to turn this promotion into significant market share is anyone’s guess. Wasz, for one, thinks that many of the first-time buyers from this deal will stick around, and that Amazon will ultimately become a major player in the local deal industry (alongside Groupon, LivingSocial and Google Offers).

But we also don’t expect to Groupon to take this challenge lying down. Don’t be at all surprised if you see the deal giant come out with a similar national deal in the coming weeks to steal back the spotlight.

Matt Brownell is a staff reporter for MainStreet. You can reach him by email at matthew.brownell@thestreet.com, or follow him on Twitter @Brownellorama.