Started in 2005, Amazon Prime is now the single most important part of Amazon’s e-commerce business. To understand Amazon, you have to understand Amazon Prime.
What you get by becoming an Amazon Prime subscriber differs from country to country. For simplicity’s sake let’s look only at the US1. For $99 per year a subscriber today gets:
- Free “fast shipping”
- Access to the video streaming service “Prime Video”
- Access to the music streaming service “Prime Music”
- Free unlimited photo storage (How can a company offer this just as an additional feature, you might ask: Amazon’s AWS advantage)
- 30-minute early access to special deal offerings like “Amazon Lightning Deals”, access to other deal events like the annual Prime Day (more on the latter in a second)
- Access to Kindle eBook rentals called ‘Kindle Owners’ Lending Library’ (in Amazon’s own words “over 800,000 free ebooks”)
- Access to Prime Now (one-hour delivery in for now selected metropolitan areas like Seattle, New York or London)
- Access to Prime Pantry (“a store where Prime members can shop for groceries and household products in everyday package sizes (for example, a single box of cereal).”)
There is more (like e.g. a -still rather rudimentary- household sharing of the membership) but the point is this: Amazon Prime is a giant, attractive bundle. It makes a very diverse offer palpable for customers. It allows Amazon to cross-subsidize products. It gives Amazon a predictable income stream. It allows for selling goods at close to or at cost and still make a profit (from the member fees).
Imagine an Amazon which tries to sell all these offerings separately; some with prices per shipment, some with flat monthly fees. How successfull would that be? At one point a company as big and as ambitious as Amazon would simply run into offering too many choices for customers.
Let’s have a look at how big Amazon Prime is. Prime Day, a new annual event, with deals for Prime members only, held this year on the 15th of July, moved the needle for Amazon. Bloomberg:
The Prime Day sales event added 2 percent to the company’s global revenue growth rate, Olsavsky said in a conference call with reporters. “We will continue it in future years and make it bigger and better,” he said.
Unfortunately Amazon does not publish numbers on Prime. One survey suggests there are 50 million Prime subscribers in the US, and between 60 and 80 million subscribers worldwide.
At the beginning of this year Consumer Intelligence Research Partners (CIRP) released a study on Amazon Prime. (press release as PDF) At that time CIRP concluded that there were 40 million Prime members spending quite a lot on Amazon:
This analysis indicates that Amazon Prime now has 40 million US members, spending on average about $1,500 per year, compared to about $625 per year for non-members.
As of December 31, 2014, CIRP estimates that in the US, 45% of Amazon customers are Prime members, which translates to about 40 million Prime members
A Prime member generates around 2.4x the revenue of non-Prime customers on Amazon. This is not surprising. Once you have paid upfront for free fast shipping, Amazon becomes your default online retailer. Even more: Because of its vast selection of products (not lastly thanks to the marketplace) Amazon even more than usual becomes the default shopping search engine for Prime customers.
Moreover, this increase in revenue likely improves margins by improving the returns on Amazon’s massive fixed investments in distribution. Amazon CFO Brian T. Olsavsky suggested this was the case while responding to a question about international growth on the earnings call:
“The base International growth is really being driven by Prime adoption, greater selection, greater Prime selection, including [fulfilled-by-Amazon]. So it’s essentially the same playbook at the U.S., the additional Prime features.”
Indeed, Amazon’s e-commerce side is arguably in a long term shift towards the Costco model: sell everything at cost and make a profit off of membership fees.
It is hard to build something like this. Comparing Jet.com and Amazon Prime also shows the real strength of what Amazon has built: Jet.com did not offer a multi-category bundle. Look above at that list. There are media offerings included in Prime. Doing this (and going further by adding exclusive content to the video service) makes the whole Prime bundle unique. It makes Prime literally incomparable because there is nothing similar out there.2
This means smaller online retailers are at an increasing disadvantage. They can’t simply offer the same convenience of fast shipping ‘+more’ because the cost structure for this is not easily replicable.
Going further, Amazon is capturing a potentially valuable customer group. (People who buy a lot of products online and value their time.) This can have severe implications for the online retail market in countries where Amazon Prime is becoming increasingly popular.
The flipside of this though is that Amazon Prime is clearly a strategy for attracting and capturing ‘whales’, customers who create a high amount of revenue. Amazon might miss opportunities for serving more ‘casual’ customers because its incentives are going more and more towards Prime and its ‘whales’.
Nevertheless, expect more bundle experiments from Amazon and other online retailers. There are profits and differentiation to gain.
- Another reason on why to look at the US is that this is Amazon’s home market. It is the most mature market for Amazon and for Amazon Prime. What Prime customers get in the US will come in due time to most other countries where Amazon Prime is being offered today. It is, in some sense, like looking into the future of, say, Amazon Prime in Germany or the UK for example. ↩
- Jet.com should have had a video streaming service in its bundle from the start, e.g. a partnership with Hulu or something similar. Jet.com or a similarly “neutral” membership partner could integrate second-tier services into an attractive bundle. It is telling that Jet.com hadn’t had that at launch. (Not a good sign.) ↩