Sunday, March 14, 2010

Estimating: The Envelope, Please.

How much does it cost Amazon to ship me a Kindle book? About a nickel.

How much did it cost us to get letters saying we're going to get census forms? About $50 million.

How do I get these? Back-of-the-envelope calculations.

Back-of-the-envelope calculations are the quick calculations we do, from simple assumptions, to give us a sense of rough sizes. They may not let us tell whether the answer is 5 or 9, but they can let us see the answer isn't 5 billion -- a 5 followed by 9 zeros.

My sister, Jo, the Tattooed Lady, wondered out loud, this week, "... just how many millions of dollars it cost The US Commerce Dept (read 'us, the taxpayers'), to send everybody in the US a letter this week that says that they will be sending us a census report to fill out. 'Ooooooo. Look out!!!! Here it comes!!!' "

Let's do a back-of-the-envelope calculation. (No pun intended.) It's not hard.

How much does it cost to send a letter? A first-class stamp costs $0.44. The USPS loses money, which is why they want to cut back to 5-day-a-week delivery. So the real cost of processing and delivering a letter is something like $0.50. Could it be $0.30? Or $0.72? Maybe. But it's less than five bucks and more than a farthing.

What's the cost of producing each letter -- printing, stuffing, and so on? At Kinko's, they'd charge you somewhere between a nickel and a dime. Ditto for the public library. Real money, but we're still talking a total cost of around half a buck per letter.

They sent one to each household, and America has over 100 million of those.

We paid at least fifty million bucks for those letters. $50,000,000 . As Jo says, "Here it comes."

But what did we pay to draft the letter, translate it into a bunch of other languages, and get all that approved and processed through our Federal bureaucracy? Probably not even an extra fifty million.

Here's a second example: What sort of profit is Amazon making on Kindle books? I wondered this last year when I bought my Kindle.

Let's see .... Once they've payed the publisher for the book, they probably get a machine-readable version for next-to-nothing -- maybe free. Converting to the Kindle data format is probably done by a piece of software that they wrote once, and amortize across all their books, which means that probably doesn't contribute much either. Amazon's big cost is probably delivery -- what they pay Sprint to get it to us.

So how much is that? Hand me that envelope.

They'll sell me a subscription to a blog for about $2/month. The content is free if I have a browser, and I can't imagine they're trying to make a lot of money from these, either. The $2 is probably Amazon's delivery cost.

The kind of person who reads a blog on his Kindle is a junkie who, I'll guess, might read it three times a day. That's 30*3 = 90, or about a hundred deliveries a month: two cents a day. Books are bigger, but they come over so fast that I bet connection-set-up and -tear-down costs dominate the price.

Amazon's sells new releases at $9.99. This calculation says almost all of that is profit. Their delivery cost, I guessed, was under a nickel a copy.

How close did I come? In a January press release, Amazon revealed it was "less than six cents."

When the government can send us useless letters by Kindle (or email), they'll cost us far less.

"But what could the government do with its vast inventory of surplus envelopes?" the politicians will ask.

Two suggestions come to mind.

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