I admire the Amazon Prime product, both as a strategist and a consumer. Prime is Amazon’s subscription offering. It launched in 2005 as a way to pay upfront for shipping – $79 for unlimited two day shipping – which I’d argue is still Amazon’s anchor value proposition. Over time they’ve added a basket of random-seeming values, including:
- Free (trial) Washington Post access
- Special Prime deals
- Prime Day
- Prime TV and Movies
- Prime Music
- Kindle owners lending library
- Amazon Family discounts of diapers and subscriptions
- Prime Photos
- Access to Amazon Prime Store Card
- Audible Channels
- Prime Pantry access
And now, Twitch Prime. It’s interesting how scattershot this offering is. I suspect that most users think of Prime as “free shipping, with other stuff”.
I was initially very skeptical of this offering as it’s subject to “cherry picking” by customers; the most expensive customers would subscribe to prime, the least would pay ala carte. Costs would be too high to be offset by benefits. There is evidence that costs were higher than expected; they recently raised the price to $99 with little loss of momentum.
Pause for a moment and consider that momentum. In January 2016, they were estimated to have 55M Prime accounts! That’s nearly half of US households, and 50%+ growth.
Anecdotally, I love Prime and I recently crunched my household numbers – Amazon accounts for 17% of all of my household’s retail spending (vs. 3% before Prime). That makes Amazon by far the biggest retailer in my life. Less anecdotally, a CIRP report estimated that the average Prime member spent$1,500 annually at Amazon, versus $625 for nonmembers. That’s an amazing value to the customer and to Amazon. Other estimates are that 20% of Amazon customers are on Prime, and ~45% of Amazon retail revenue comes from Prime users. By any measure, Amazon Prime is a success.
Amazon is also making Prime “sticky” – that is, hard to quit. This is a many-faceted effort that includes: Lots of value – Prime is compelling and once you’re used to it, it’s hard to live without. Hardware and platform strategy: I have a Kindle, several Echos, and a Fire TV. These devices represent real sunk cost, and if I leave Prime they all become much less valuable as much of their content disappears.
The only shadow over Prime is its costs. Shipping is expensive, and getting more so. All that music and video must be licensed at high monthly costs. Lesser costs include cloud storage. But the new $99 subscription cost probably comes within striking distance of breakeven (e.g., $50 shipping, $20 music, $10 video are educated guesses). That would make TAC savings and incremental sales all or mostly upside.
The best sign that Amazon is happy with the balance given the continuing push for more Prime users.
What it Means to the Competition
Prime is a real threat to the competition. Prime customers are shifting spending from Best Buy, Safeway, etc… to Amazon. Now that I’m an Amazon Prime customer, I go there first to buy things. And that’s a threat to Google, who like to be where I go to shop. Even if I end up at Amazon, if I start at Google.com, Google collects a tax – but no longer if I start at Amazon.com. This could save Amazon (and cost Google!) billions of dollars.
Over time, it’s a threat to other services businesses. Amazon is throwing in a ton of value that pure plays like Netflix, Spotify, Dropbox, and others must charge a fee for.
The big winner is Amazon customers, of course – at least for now. As I’ve written previously, the best relationship to have with Amazon isn’t partner, supplier, or even employee – it’s being a customer.