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Amazon's shipping news: Half off again

How low can it go? The e-tailer drops its free shipping threshold to $25, and ups the competitive ante.

How low can it go? is dropping its free shipping threshold to $25, in a "long-term test," the company said Monday.

In January, Amazon announced it would offer free shipping for orders over $99, prompting several retailers to follow suit. It dropped that number down to $49 in June.

The latter price cut prompted retailer to eliminate shipping charges entirely on some items.

The Amazon latest offer does have some caveats: Not all products are included, and the order will add three to five days to shipping times.

"There may be reasons to shop in the physical world, but price is not one of them," Amazon CEO Jeff Bezos said in a release.

Free shipping became a standard promotional gimmick in the early days on Internet commerce, when companies tried to sign up as many customers as possible at the expense of profits. Many companies eliminated the deals after the dot-com bust.

Amazon may have figured out how to cut shipping costs deep enough to finance the drops. The company recorded $81 million in revenue from shipping costs in the second quarter, down from $89 million in the first quarter of the year. But it posted a $2 million profit in shipping charges for the three months ended June 30, reversing a loss it had recorded in the first three months of the year.

In a filing with the Securities and Exchange Commission, Amazon attributed the improvement in shipping results in part to "injection shipping," where large quantities of items destined for similar geographic locations are sent to a geographic hub.

The company said it continues to view shipping promotions as "an effective marketing tool," and said it expects future promotions to lower shipping revenue as a percentage of sales and negatively affect gross margins.

So far, the shipping moves have helped sales. For the second quarter ending June 30, Amazon reported sales of $806 million, up 21 percent from $668 million in the same quarter a year ago. Amazon also pared its net and pro forma losses for the quarter.

The additional price cut could prove more difficult to finesse, said Ken Cassar analyst at Jupiter Research. Amazon's gross margin for the second quarter was 27 percent--which gives it $6.75 out of every $25 order to pay for marketing, fulfillment and the cost of shipping.

"It's an aggressive offer, and I have to say I worry that they may not be able to cover all of their costs at a $25 minimum-order size. I have no doubt that it will move volume at least in the short term," Cassar said.

What may prove even more difficult, Cassar said, is backing away from the promotion.

"Coming into the holiday season this definitely creates a high bar. You do wonder what this may foreshadow for the holiday season. As a consumer I hope we're looking at a holiday season filled with destructive price cuts, but as an industry advocate I'd hope the opposite," he said. "Amazon is going to be hard pressed to roll this back when the holiday season is over."