Debunking Amazon Prime

When Amazon Prime first came to market, it was a loyalty program like nothing before. There were no points involved, no credit card needed, and no discounts (until Prime Day came around). Sure, shipping was free and much faster, but paying $79, then $99, and now $119 yearly for a Prime membership does not seem like any sort of “loyalty” program to me. However, I’m sure the majority of people in this class or their families have a Prime account. Why? Because of customer loyalty.

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Vijay Ravindran, director of Amazon’s ordering systems, says: “it was never about the seventy-nine dollars. It was really about changing people’s mentality so they wouldn’t shop anywhere else.” Although this is costly in the short term, the long-term behavioral effects mean that shoppers will not only default to Amazon but that they will buy more. Once customers became “hooked” on their Prime memberships, they would buy much more, and this was intentional on Amazon’s part. Brad Stone, author of “The Everything Store,” explains that “a Prime member was like a shopper who walked into a Costco warehouse for a case of beer and walked out with the beer plus an armful of DVDs, a nine-pound smoked ham, and a flat-screen television.” Similarly, Wells Fargo analyst Matt Nemer says “Prime members spend, upwards of three times what they would without the service.”

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In this way, Amazon Prime clearly reached its 2005 goal of getting customers to spend more. Furthermore, the company added Prime Photos, Prime Now, Prime Instant Video, discounts at Whole Foods, and access to Twitch e-sports streaming platform, causing customers to be even more loyal to Amazon and its capabilities through Prime.

As a result, customers value Amazon so highly that they no longer price compare or even consider the alternatives. The overall experience that Prime has to offer is what makes it so successful, with over 100 million users today. This is also the reason why Amazon can increase the price of a Prime membership, as they jumped up to $119 annually.

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The main reason that the memberships have to increase is because of the large amount of money that Amazon loses on shipping : $7.2 billion in 2016.

So, who are these Prime subscribers that Amazon is losing money for?

One report claims that 82% of people that make $112,000 or more a year own a Prime membership. On the contrary, only 52% of those making less than $41,000 a year have an Amazon Prime subscription. Since this report, Amazon has catered directly to this market, and now offers a 45% discount on Prime memberships to U.S. residents receiving government – a big hit at Walmart, who previously captured the majority of this market. As a result of these strategic moves, Prime membership growth has been the strongest among households making less than $50,000 annually.

 

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What I learned from the history of Amazon Prime is the importance of a great customer experience. Once a consumer is already attached to a product, they are less likely to find an alternative when the price goes up. Understanding this logic, Amazon was willing to lose money in shipping and operational costs at the beginning of their Amazon Prime launch, knowing that it would benefit them in the long-term. By doing so, they are able to increase membership costs without any major churn in users.

In this way, customer service is really what really differentiates Amazon and causes Prime users to think of them first. When thinking about customer experience, I question how I have become so loyal to the other products I use. With Starbucks, the employees use personability and efficiency to make my drink, and with Apple, the engineers architect a sleek, fast user experience as well as an aesthetically pleasing store. Therefore, these experiences and customer prioritization allows for customer loyalty, and once this is achieved, the switching costs are too high, so users unquestionably remain loyal to their brands.

 

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http://business.time.com/2011/11/14/amazon-prime-loses-11-annually-per-member-and-its-a-huge-success/

https://money.cnn.com/2018/04/27/technology/amazon-prime-strategy/index.html

https://www.geekwire.com/2017/true-cost-convenience-amazons-annual-shipping-losses-top-7b-first-time/

http://fortune.com/2012/02/21/amazons-prime-and-punishment/

10 thoughts on “Debunking Amazon Prime

  1. Amazon Prime has made our lives so much easier which is why people aren’t straying from the service despite the increases in membership. Amazon has lured us into constant impulse buying with 1-click purchases, and more recently, the Amazon buttons (which I think is a little scary to have lying around). Amazon has completely changed how America shops, with expectations for e-commerce requiring a wide variety of offerings with free and fast delivery. This has made consumers unwilling to use other sites and causing us all to be completely hooked.

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  2. There are lots of membership cards in the market right now. Most of the major clothing stores, like Nordstrom, Macy, Saks Fifth Avenue have their own membership program. Also, all the airline companies have their own loyalty program, and all the banks charge annual fees for their high-level credit cards. Inviting customers to a company’s membership program is an efficient way to increase its staying power. People are more likely to go shopping at the stores where offer them special discount or privileges, regardless of how much those special offers really worth.

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  3. It’s so great that Amazon tailors its prime membership fee by the demographic of its consumers. As a full-time student, I enjoy the perks offered by the Prime Student program: 6-month free trial and then 50% off the regular annual membership fee. Needless to say, Amazon has become the go-to place for a lot of people because of its outstanding services.

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  4. I had no idea that Amazon offered discounts on Prime to those receiving government aid. I’m a brand ambassador for Student Prime and it seems like most students on campus are using it. I’ve heard very few instances of customers churning from the platform. 2-day shipping has become the norm in my life, meaning I’ll probably be a customer for most of my life, or until the next best thing comes along.

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  5. Great post, but you have your stats a bit backwards. It’s not that 82% of Prime Users make $112K/ year, but that 82% of the people who make $112K/ year in the US are Prime Members. That’s a staggering number!

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  6. Amazon Prime is a feature that I regularly use, but rarely pay much attention to. I loved the comparison with CostCo, as I often find myself going to Amazon to buy a textbook, and then adding 3 or 4 unrelated products to my cart –– solely because of the convenience of 2-day delivery. I always wondered how Amazon compensated for the delivery costs, but those statistics on membership speak for themselves.

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  7. I read “The Everything Store” this summer, and Brad Stone provides a lot of insight on how Bezos runs his company. I really love Amazon’s customer centered focused business model. However, I was unaware of the different features and collaborations offered with Amazon Prime. They seem to display a long-tail selection of products, which is what makes the company so unique and successful!

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  8. Great insights into Amazon! I wholeheartedly agree that Bezos’ and Amazon’s prioritization of the customer has helped it establish a sustainable competitive advantage over the years. In “The Everything Store”, Brad Stone writes “Bezos believed that high margins justified rivals’ investments in research and development and attracted more competition, while low margins attracted customers and were more defensible… Like Sam Walton, Bezos sees it as his company’s mission to drive inefficiencies out of the supply chain and deliver the lowest possible price to its customers.” Bezos ensured that the customer was satisfied at every step of the way, helping to create lifelong Prime members and families.

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  9. This is such a good point about Amazon Prime. I have a subscription that my family shares and we order so many unnecessary things, simply because it is convenient. It helps now that Prime customers get certain discounts at Whole Foods, which incentivizes my family to shop there more often. Prime is definitely one of Amazon’s best assets in securing consumer’s staying power and investment in their service.

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