And that was fine. Google, eBay and others soon followed suit and stories about delivery wars proliferated, including fanciful depictions of drone delivering groceries, etc.
But it soon became apparent that Amazon, as has been its wont all along, was playing a longer game. And that was to build an indomitable institution always one step ahead of its competition, even - or perhaps especially - if that competition was still years away.
As Amazon began to offer services via Amazon Prime, its greater value emerged: as a source of customer loyalty.
Loyal customers spend more and cost less because they dont require expensive marketing. That's what loyalty means in the commercial sense. They also pay for the privilege of being loyal, which may seem bizarre - shouldn't they be the ones being rewarded? - but, in fact, they are people for whom time may be more valuable than money, up to a certain point. In Amazon Prime's case, this may mean as much as $4 billion a year in fees just for the privilege of belonging.
In effect, Amazon is locking up customers' wallets through service, special offers and occasional discounts that actually pay for themselves. In addition to CEO Jeff Bezos' original supposition that people might be enticed to do their shopping online. This is not a company against which wise people should bet. JL
Marcus Wohlsen reports in Wired:
Of all Amazon’s long bets, Prime seems to be the one that’s most paying off, second only to the initial gamble that people would want to shop online.
Ten years ago this month, Jeff Bezos announced Amazon Prime to the world. “It’s simple,” he wrote in a letter posted to Amazon.com. “For a flat annual membership fee, you get unlimited two-day shipping for free.” It’s funny to look back and see how Bezos baked a little marketing sleight-of-hand right into the product launch—the shipping is not really free, after all, if you’re paying a fee. But one piece of what Bezos promised has held true for the past decade: For customers, Prime turns out to be dead simple.
But if Prime is simple, it’s also weird. For the first six years, Prime was about shipping. Then, in 2011, Amazon decided to add a service that had nothing whatsoever to do with shipping: unlimited streaming video became another perk of Prime. At least “perk” was how I thought about it at the time, a little bit of icing to make the 2-day-shipping cake taste even better. But it also seemed random—another experiment in Amazon’s workshop of “misfit toys.”
Instead, this strange combo—which has expanded to include streaming music, an e-book library, and photo storage—has been an unvarnished success. After raising the annual fee last year by $20—from $79 to $99—some of us argued Prime was too good to be true, that the costs of its big promises had caught up with Amazon. Instead, Bezos announced late last month that in the fourth quarter of 2014, paid Prime memberships had climbed 50 percent in the US and at an even greater clip worldwide. Prime’s seemingly random hodgepodge is, it turns out, a finely tuned engine that drives the consumption of physical and digital goods in a seemingly unstoppable cycle optimized for the 21st-century economy.
Jeff Bezos’ letter announcing Amazon Prime.Amazon
Value Added
Just how much extra business Prime drives to Amazon is one of the company’s most closely guarded secrets. It won’t say how many Prime members it has or how much more they buy from Amazon than everyone else. This has turned educating guessing into an obsessive parlor game for journalists and stock analysts. In late 2013, Amazon went so far as to reveal it had “tens of millions” of Prime members. Some interpreted this morsel to mean Amazon had just hit 20 million Prime members, or just enough to claim “tens,” plural.
In a report released in September, RBC Capital Markets analyst Mark Mahaney said the results of a survey his firm conducted suggest Prime membership was in the 40 million to 50 million range and on track to hit as many as 85 million in 2016. Why do these numbers matter? At 40 million members, the $99 membership fee alone would mean $4 billion in revenue. Still, that figure no doubt doesn’t make up for the billions Bezos said Amazon spent on Prime shipping in 2014, especially adding in the $1.3 billion he says his company spent on Instant Video.
The most convincing case for why Amazon pushes so aggressively on Prime is that members just spend a lot more. Analysts have found Prime customers spend somewhere in the realm of three times as much on Amazon every year as their non-Prime counterparts. Even factoring in the extra costs, this spending makes Prime members much more valuable to Amazon’s bottom line.
The value of Prime customers to Amazon is evident in all the additional services the company keeps layering on top of the basic shipping benefit, says Mahaney.
“They wouldn’t be putting this much effort into making the Prime program more attractive if it didn’t work,” he says.
Amazon Fire TVVideo In
But the additional Prime services by now appear to be more than a driver for people to buy more physical stuff on Amazon. Mahaney says that in his most recent survey, 10 percent of Prime members said they signed up primarily for the video.
Even if video isn’t what Prime members came for at first, it appears to be a big reason why they stay. In a call with analysts following the release of its third-quarter results in October, Amazon Chief Financial Officer Tom Szkutak revealed a striking bit of Prime-related data. He said that Prime members who stream video renew their memberships at “considerably higher rates” than those who don’t. Similarly, customers who sign up for Prime’s 30-day free trial are more likely to convert to paying members if they watch the video service during that month.
In that light, Amazon’s decision to go beyond its already ambitious move into original television to produce original movies begins to make more sense. Netflix makes original shows and movies to get more people to pay to watch its videos. Amazon makes original shows and movies to get more people to pay to watch its videos—and to make them more likely to buy toilet brushes and laundry detergent and shoes and diapers. Even some of Amazon’s moves into hardware, especially Fire TV, make more sense as vehicles for locking customers into Prime than as devices meant to generate significant revenue streams in themselves.
“Our devices work better with Prime and Prime works better with the devices,” Amazon vice president Greg Greeley, who leads Prime, said in an interview with WIRED.
Bizarrely Good
As the failure of the Fire Phone demonstrated, those devices have to strike the right balance between creating value for users and value for Amazon. But as a product, the value of Prime is hard to dispute. Greeley calls the decision to raise the price of Prime “painful” but argues that each individual service offered through the program is alone worth $99 per year.
The math mostly seems to bear him out. At $8 per month, a streaming video membership on Netflix comes to $96 per year. A Spotify premium membership is $10 per month, or $120 per year. One terabyte of storage space on Dropbox for photos (or whatever else) also costs $10 per month.
But all of these would seem to pale compared to what a Prime membership saves customers in shipping. The standard rate for two-day shipping on UPS comes in at a little below $15 per package. In 2014, I made 16 orders that were eligible for Prime shipping—$240 at that standard UPS rate. In a recent article, New York Times columnist and Prime power user Farhad Manjoo said he had made 90 purchases from Amazon in 2014. If all of those were shipped 2-day, those orders at the standard UPS rate would come to a minimum of $1,350, and likely much more taking their total weight into account.
Even if video isn’t what Prime members came for at first, it appears to be a big part of what makes them stay.Amazon has immense leverage to negotiate massive volume discounts with carriers. But from the customer’s point of view, that doesn’t matter—instead of trying to squeeze a few extra bucks out of each order on shipping, Amazon is doing everything it can to make shopping online feel like shopping in the store. As analyst Mahaney puts it, Prime is a way for Amazon to build a “competitive moat,” a way of “really locking customers in.”
Compared to its tech rivals, Amazon’s profits are tiny. But Bezos describes Amazon as a business playing the long game, not seeking short-term gains. Of all Amazon’s long bets, Prime seems to be the one that’s most paying off, second only to the initial gamble that people would want to shop online. History now sees that idea as so obviously right that it no longer warrants discussion. Prime is etching itself in the annals of corporate lore as one of the most bizarre good business ideas ever.
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