Amazon Prime and the Ripple Effect
Amazon is the largest online retailer in the world, no prizes for guessing that and Amazon Prime is their first foray in the world of subscription based businesses. Jeff Bezos recently opened Amazon’s annual shareholder meeting with the news that his company had reached a landmark milestone: $100 billion in annual sales. What’s impressive is that, they have achieved this figure, faster than any other company in history. A lesser known but equally impressive statistic was the 51% Y-o-Y growth of Amazon’s paid membership program — Amazon Prime. An impressive feat given the fact that it is a paid service. If you’re an Amazon Prime member, ever wondered how Amazon can give away so much for seemingly so little in return?
It isn’t rocket science. Once a customer places their first prime order, they are locked in for an entire year’s worth of subscription contract. This effectively means that you will shop with Amazon for the entire year. According to a 2015 Recode article, Prime members spend nearly two to four times as much as non-prime members, making it one of Amazon’s most valuable assets.
What attracts shoppers to Prime? 3 Words — Convenience. Benefits. Elitism.
Convenience. Let’s face it. Who likes to pay for shipping? According to a Wharton study conducted in 2014, shoppers tend to spend nearly 30% more if free shipping is included and merchants get nearly 24% more orders if next day delivery is available.
Benefits. The benefits of Amazon Prime are H-U-G-E. Early access to the best deals and discounts everyday, unlimited access to movies and music (not yet in India, but it should be here soon).
Elitism. It’s Prime day. You’re a Prime member, your friend is not. You get discounts, your friend doesn’t. It is the feeling of exclusivity that reigns you in, as simple as that.
What makes it work for businesses? 3 Words — Predictability. Margins. Retention.
Predictability. The advent of online shopping has given compulsive online shoppers a dangerous power to wield. Shoppers return goods left, right and centre. It is impossible to fathom why certain goods are returned and this can have a massive impact on revenue. But, if a portion of your revenue is generated by a subscription based model, it brings in more predictability to your business forecast.
Margins. E-Commerce vendors often have wafer thin margins and rely on volume sales. Data from Consumer Intelligence Research Partners shows that the average American Amazon Prime member spends nearly $1500 per year versus $625 for non-prime members.
Retention. This is the crux of the matter. Amazon Prime has a staggering 92% retention rate. Macquarie Securities estimates that by 2020, half of American households will be Amazon Prime members. If the numbers are to be believed, Amazon’s revenue will increase by 1.5% for every one million Amazon Prime members. Imagine how far Amazon can forecast their revenues with that figure.
With Amazon’s success, it’s no surprise that e-commerce subscription models are on the rise. Amazon did not invent the subscription model, yet all e-commerce subscription models are now dubbed “Amazon Prime style” subscription model. Closer home, Flipkart and Snapdeal were quick to roll out Flipkart Assured and Snapdeal Gold respectively.
And Amazon being the juggernaut that it is, the Prime model is now seeing a ripple effect across brands and verticals. Sephora is launching a subscription offering called Flash, that for $10 a year gives customers two-day shipping on all online purchases. Apple is offering a subscription plan on your next iPhone purchase. The big daddy — Walmart is testing a subscription based offering called the Shipping Pass.
In what could be the next big splash in the world of subscription based models, Uber has rolled out a Prime style subscription model — riders pay up front for a month of cheap rides. The beta program called Uber Plus has been rolled out in 6 cities — San Francisco, Seattle, San Diego, Miami, Boston and Washington D.C. The program’s cost varies by city, but the upfront payment can be as low as $20 for a package of 20 to 40 trips at reduced flat fare prices (and no surge pricing) in September. Such prices are attractive not only for those who use Uber regularly, but also for those who use competitors such as Lyft. While the unit economics may show that this will cause Uber to lose more money per ride, it is a worthwhile trade-off to win over users and more importantly, retain them.
If anything, Amazon has proven that the time for subscription based models has arrived, or should I say, it is in it’s Prime?
You can also read this post on LinkedIn here.