The Brilliant Strategy Behind Amazon Prime
Amazon's prime business model & strategy is all about customer retention, loyalty & recurring sales.
With 200+ million members, Amazon Prime is one of the most successful membership programs.
Once you become an Amazon Prime member, you get a host of benefits like:
- FREE same-day or two-days delivery
- FREE access to Prime Video, Prime Music, Prime Gaming & Prime Reading
- Exclusive deals on selected products
- Discounts & FREE delivery benefits from Amazon's subsidiary stores like Amazon Fresh & Whole Foods Market
In 2005, Amazon launched it's Prime membership service in the US. Since then, there's been no looking back. For customers, Amazon Prime is a no-brainer purchase & for Amazon, it's a no-brainer strategy.
Note that, membership programs aren't new to retail industry. They've been there ever since Costco launched its wholesale club membership in 1983. But, Costco has ,till date, added 100+ million members worldwide. Yes, in 30 years. Whereas, Amazon has crossed 200+ million subscribers in mere 15 years. Despite that Costco membership costs $ 60 a year vs. Amazon Prime's $ 129 a year.
So, what's behind this wildly successful membership program? Let's peak in.
You Save a Ton of Money
Amazon Prime saves you a ton of money. This is the core reason why Amazon customers buy Prime memberships.
Let me explain this with an example:
Suppose, you order 75 shipments a year (average 6 shipments/month) from Amazon. Each shipment costs $ 5 for non-prime customers. So, essentially, you need to pay $ 375 a year (75* $ 5) as shipping fee. No-brainer math = You save $ 236 ($ 375 - $ 139 [prime subscription fees]) a year.
So, just by paying $ 139, you save an extra $ 236. Why wouldn't you take a prime membership then?
This calculation only makes sense when you buy most of your stuff online. Which, of course, most of us do. Look, Amazon is the World's most popular eCommerce marketplace. It has got millions of sellers, offers fast delivery, great prices, instant customer service. If I need to shop online, the first place I would search is Amazon - regardless of whether I'm a prime member or not.
With Prime, Amazon offers something their customers can't refuse. Why wouldn't a loyal Amazon shopper want to save money? Again, a no-brainer.
Despite The "Loss", Amazon Still Wins
Superficially, it may seem like its only the customers who tend to win with Prime membership. But, that's not true.
Look, Amazon is a for-profit business & like every other business, it has got business objective, goals & vision. They want to maximize their shareholders' wealth. They want to generate cash/profit. They want market share.
So, why would Amazon launch a membership program that bleeds money?. Here's a spoiler: Amazon doesn't lose money with its Prime offer.
To understand this, you need to be aware that Amazon makes money through:
- Commission on sales (it collects this from its sellers) - this can be as high as 10%
- Sponsored listing fees (sellers pay Amazon to make their products rank higher in the search results)
- Private label products (Amazon has got a range of products with its own branding)
- FBA fees (Amazon stocks products & processes orders on behalf of its sellers. It charges fee for the same)
- Shipping & delivery fees (it collects this from its customers)
As you can see, Amazon has got a wide number of ways to make money.
Now, for a Prime order, it doesn't make money on shipping or delivery. In long-term, (as I showed in the aforesaid calculation), as a Prime member orders more, the member gains whereas Amazon loses money.
But, the money Amazon loses over & above it's subscription fees is easily offset by the commission & FBA fees it charges from its sellers. Apart from that, it has its own private label products where it earns a good margin upfront. And, sponsored listing - the fastest growing money making service of Amazon.
Yes, it's all about numbers.
Despite losing directly on shipping & delivery fees, it gains indirectly from its back-channel seller services.
Now, let's talk about an important non-number benefit that Amazon enjoys with its Prime membership service:
LOYALTY. RECURRING SALES. PREDICTIBILITY.
eCommerce industry is filled with powerful players. Amazon knows this. So, with Prime, Amazon is looking to build a loyal base of customers who would not even think about buying from its competitors. The mission: Create a MOAT & keep the competitors at bay.
A Prime membership induces a member to spend more on Amazon. Of course, once you've paid $ 139, you want to shop more to take full advantage of your membership. This means more volume & recurring orders for Amazon. Again, more volume means more money from back-channel services it offers to its sellers.
Money that Amazon makes from its Prime membership is somewhat predictable in nature. No matter how the economic cycle plays out - Amazon knows one thing for sure - Membership fees isn't going anywhere.
Now, you decide who wins with Prime: Amazon or The Member?
Commerce + Content = A Winning Combination
Amazon is best known as a shopping platform. However, as you know, it also offers content like movies, videos, games, music & books through its subsidiary arms. Yes, Prime members get these content FREE of cost.
But, why would Amazon offer content for FREE when it already has justified its Prime membership value by offering FREE shipping?
In marketing, there's a saying - "Offer something so valuable, your customers would find it hard to refuse.". Amazon, with Prime, offers exactly the same. It's hard to refuse a Prime membership when you're getting a stack of unbelievable benefits.
Offering great content for FREE is like cherries on a cake. The cake being the money saved on shipping.
Again, it boils down to loyalty. Keep the members happy with awesome content & they'll shop from Amazon frequently. This results in more sales volume which means more money for Amazon.
The Curious Case of Amazon Prime Video
Amazon Prime Video hosts thousands of movies, tv shows & documentaries. Think of it like Netflix.
As a Prime member, I feel I get better value from Prime Video than from shopping itself. Though, I'm a regular shopping freak.
Because I love consuming video content & value-wise I feel Amazon Prime Video alone is worth the cost of my Prime membership. I'm sure most Prime members feel the same.
With Netflix, one has to pay $ 9.99 a month.. that equates to around $ 120 a year. Whereas with Prime Video, one has to pay $ 139 a year which is essentially targeted at saving shipping fees. So, can we say that Prime members get Prime video for FREE?. Yes.
Wait.. Prime video comes with 25,000+ titles as compared to Netflix's 8,000+. Good? Unfortunately, NO... because quantity isn't everything. When it comes to content, quality matters more. I'm a Netflix subscriber as well & let me confess its an absolute joy watching shows there. Clean interface, high quality shows, great viewing experience & smart recommendations.
Since Prime video is as popular as the shopping platform itself, Amazon should work towards improving its viewing experience (yes, Netflix is way ahead).
The Future of Amazon Prime Video
As per media reports, Amazon is planning to double down its investment in creating original content. And, as you know, original titles are the biggest growth drivers for content streaming platforms.
That's a smart move.
But, Amazon needs to do more with Prime video. If managed well, Prime Video can drive enormous growth in Prime memberships. It's poised perfectly with unlimited capital & a strong subscriber base.
Here're a few of my suggestions:
- Focus more on quality rather than quantity
- Improve the viewing experience (at par with Netflix or HBO)
- Don't let ads ruin the experience
Amazon already sees Prime Video as an acquisition channel. Going a step further, it needs to nurture that channel. Make Prime Video so good that people would flock to take Prime membership solely for content (not for shopping).
The Prime Day Craze
Amazon is so much into Prime membership that it celebrates (every year) 2-days special sale event for members. During these Prime Days, it offers jaw-dropping discounts on some of the major brands & products.
Example: You can save $ 100 on an iPad, $ 16 on a hair dryer, $ 22 on portable flash light, etc. Personally, I've found some great deals on electronic items. Do check them out on the next Prime Day.
Now, that's an extra reason to buy a Prime membership. Do we need more? :)
This Prime Day is celebrated not just in the US but also in other countries like the UK, Singapore, Spain, Japan, India, Canada, etc.
Last year (2021), Prime Day generated $ 11 billion in sales globally.
Due to the FOMO (Fear of Missing Out) factor, non-prime members are tempted to buy that Prime membership. Again, with events like these, Amazon garners a lot of press coverage, word of mouth & brand awareness - which in turn drives Amazon Prime membership.
Amazon Prime Pricing Strategy
Historically, Amazon has increased its Prime membership fee three times:
- 2005 (Launch) = $ 79
- 2014 = $ 99
- 2018 = $ 119
- 2022 = $ 139
How does Amazon price its Amazon Prime service? Why $ 139 a year? Why not more? Why not less?
My understanding is that Amazon takes into account the rewards/benefit enjoyed by a member into consideration while pricing its Prime offer.
Ultimately, as I said earlier, Amazon needs to price its offer so that its customers would find it difficult to refuse. So, if Amazon charges $ 139, it knows it provides value much more than that. Again, the idea is to make the offer a "no-brainer" purchase. Example: Let's say if I get a value of $ 1000 (saving in shipping cost, prime video, prime music, amazon fresh, etc.) by investing $ 139, why wouldn't I buy a Prime membership?
In developing countries, Amazon has priced its Prime membership low enough to entice consumers from all sections of the society. So, this also shows that Amazon takes cost of living index into consideration while pricing its offers. Of course, why keep the price same for all countries?
Supply Chain & The Quality of Products
Amazon's Prime membership isn't just about FREE shipping & content. In the backend, there's so much more into it.
Look, Amazon Prime products are stuffed by Amazon in its own warehouse. Based on seller & product ratings, Amazon decides whether a product should be made Prime "eligible" or not.
The products that are Prime "eligible" are tagged as "Prime" on product listings. And, as you know, Amazon pushes Prime eligible products higher up in its search results.
The end result: Better quality products for its Prime members.
So, when you become a Prime member, Amazon wants to ensure best possible experience not just in terms of delivery but also in terms of product quality. When an item is marked as "Prime", you know the product quality is vetted by none other than Amazon.
Market Share & The Loss Leader Strategy
Amazon has got presence in 20+ countries. It wants to capture & rule the World's eCommerce market. And, the only way to do so is by building a loyal customer base.
Amazon Prime exactly helps Amazon do that. When you buy a yearly Prime subscription, you're indirectly committing to Amazon to buy from them for the next 365 days. Isn't it? By doing so, you're staying away from Amazon's competitors.
And, when I talk about competitors, none of them are even close to Amazon.
In today's eCommerce industry, new entrants should be ready to lose mammoth money. But, when you've the mighty Amazon in front of you, how much can you afford to lose? Yes, that's where Amazon stays ahead in the game. With strong financial base & a robust eco-system, they're way ahead.
In fact, Amazon has become so synonymous with online shopping that - In the US, half of product searches begin on Amazon website or app.