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.
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.”
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.
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.
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.