There are two sides to the Amazon Prime story.
On the high side, the program was proclaimed in a Business Week article to be “….. maybe the most ingenious and effective customer loyalty program in all of e-commerce, if not retail in general”. On the other hand, in the midst of battle with Apple over book readers and tablet PC’s, a $558 Million net loss on shipping expenses in Q3 2011 caught the attention of the investment community as the price of Amazon shares fell significantly during the past month.
Amazon describes “Prime” as its customer loyalty program and has pinned its customer retention and growth strategy closely to this tactic. The question is, can a customer club constitute an effective loyalty strategy and is Prime really working for Amazon?
If you are not familiar with Amazon Prime, it is constructed as a classic “Customer Club”, offering benefits to members in exchange for an annual fee. It is logical to think that members who already order often from Amazon will self-select as they realize a $79 annual fee to join the club is a better deal than paying shipping costs on each order.
Any benefits on top of free shipping are icing on the cake, so the no-minimum order size, unlimited instant streaming of digital media with Prime instant videos, and ability to borrow a free Kindle book monthly from Kindle Owners’ Lending Library sweeten the Amazon Prime offer and make it a no-brainer for current customers to join.
The measuring stick of customer clubs (and loyalty programs overall) is to understand if incremental sales are created and if the customer value to the brand increases among members when compared to non-members.
The numbers reported from Amazon clearly indicated that Prime is an effective driver of positive financial results for Amazon. The growth in average customer sales over the first year of membership more than doubled from $400 to $900 and the annual spend of a Prime member is $1,515, or 4.9X the spending level of non-Prime members ($307.80). Add to this that every 1 million new Amazon Prime members increases total revenue by 1.5% and you can see that this club delivers more than free shipping.
If Amazon Prime was just a place for Amazon cherry-pickers to gather, there would not exist a differential between annual purchase volume when comparing members and non-members. Based on what I’ve read from the investment community, the criticism of Prime over increased shipping costs is not telling the whole story. Financial analysts should judge Prime on a more holistic basis, taking into account the profits from incremental sales while netting out the cost to deliver the benefits of the program.
More positive news for Amazon is that the program has penetrated only 4% of the customer base, even taking into account 250% estimated member growth estimated between 2009 – 2011. Customer satisfaction with the program is solid, with 92% of members surveyed in a Piper Jaffray study indicating they plan to renew their membership.
Amazon has been able to leverage the most sought after benefit from online retailers – free shipping – and turn it into the cornerstone of an effective customer club. With the wide array of products available for sale and their depth of customer knowledge, look for improvements and enhancements from Amazon Prime that will further benefit its customers and solidify their preference to buy from Amazon.
By: Carlos Dunlap