Amazon Prime VS Physical Stores — Case Study

The Prime Paradox & How To Profit Off-Line

Third-quarter earnings reports came out recently, and boy, oh, boy, does Amazon’s dress to impress!

Amazon’s “physical stores” — a new addition to their quarterly reports—earned the company $1.28 billion. Pretty modest number, right? But, compare that to the e-commerce giant’s $26.4 billion profit margin, and physical stores are a mere tumbleweed to the thriving oasis.

If only my bank account had these kinds of digits.

But something’s amiss here… Whole Foods, which was purchased for $1.3 billion, makes up nearly all of these physical store profits. What about Amazon Bookstores? You know, the brick-and-mortar stores Amazon built to disrupt the book industry?

Turns out, Amazon Bookstores barely profited at all, leaving some to wonder what went wrong with their marketing execution. What caused Bookstores to fail so hard?

Simply put, I believe Prime Membership killed the bookstore.

Amazon’s User Base

Let’s take a look at the people who use Amazon. It’s become the one-stop shop for all things online. Beauty, clothes, tech, tools. If you can think of it, Amazon probably has it.

From this, we can safely assume that their is no specific user base on Amazon. They serve people of all ages, genders, and races from all corners of the world. Amazon attracts everybody.

Amazon Prime, however, is far more exclusive.

How do they even pull off same-day shipping? HOW?

At a modest $99/year USD, or $79/year CAD, Amazon Prime offers the most for the least: Free two-day shipping,access to Prime Video, Prime Photos, and great Twitch deals. With so many features, what’s not to love?

While appealing, this price tag isn’t for everybody—especially those who dislike shopping online. Some people prefer to go to stores and check out the physical objects themselves. Amazon Bookstores are for precisely these people. With their entry into the physical market, Amazon wants to grow their Prime member base to those seeking more than just an online experience.

Amazon is making Prime attractive for people both on- and off-line, but a glaring issue is getting in the way…

Bookstores Favour Prime Memberships

Surprise, surprise! Much like their online deals, Amazon gives discounted prices to those with Prime memberships in their Bookstores. All sales that happen are exclusively for Prime members. Thing is, these sales aren’t any better than ordering online, so what’s the point of going to the store?

Is this even a DISCOUNT? What’s the point of going?

PROBLEM — Physical Buyers Don’t Have Prime

Those who prefer to buy products in person are not the typical people with Prime memberships. In fact, users who exclusively use the Bookstore wouldn’t even benefit from getting a Prime membership.

If you have a Prime membership and you want to buy a book, you could go to the Bookstore, get the amazon.com price, and have the book in your hand by the time your latte is done. Easy as pie.

In contrast, if you don’t have a Prime membership, you’re stuck paying full list price for the book…

…except, you’re not.

You know where you can get essentially brand new books for big discounts, delivered right to your door? Oh right, at amazon.com.

Yes, it’s literally cheaper to order the book online through a 3rd party vendor than it is to pay full price (or even Prime price!) at an Amazon Bookstore. You can get the in-store Prime price online without a Prime membership. So why would you ever go to the Bookstore if you’re not a member?

Amazon’s direct competition is itself.

I get what they’re trying to do. Amazon is harking back to the golden days when it was just a service to purchase books. These stores are a way to enter and take over a competitive market to drive out the competition. But do they provide a good user experience?

These new bookstores benefit Prime members, but nobody else.

Like I said, if you don’t have Prime, there’s no real reason to visit an Amazon Bookstore—any and all products can be found cheaper on Amazon’s website. Additionally, given the infrequency which people visit regular bookstores, getting a Prime membership just for Bookstore sale prices and discounts simply isn’t worth it.

Why would I drive out here if I could get Alexa to order for me in 30 seconds?

Amazon Bookstores are prestigious—they cater to members, while giving an illogical shopping experience to everyone else.

The Prime paradox is this—by only giving a good experience to Prime Members, sign-ups aren’t increasing… non-Prime visits are just decreasing.

How Will They Survive?

There is one way that a Prime membership makes sense for off-line customers:

A Prime Lite membership.

Prime deals can knock a few bucks off most purchases, but you rarely get your money’s worth unless you’re spending a bunch of money with Amazon. This is why Amazon is selling the Echo and other hardware in their Bookstores—to get higher-ticket items and bigger deals in-store. That way, members can save more money on purchases. With books, the ticket price just isn’t high enough to justify the deals a membership would bring.

If the membership was less, however, then users might start getting their money’s worth.

Let’s say you buy 1 book every month.

The average novel-sized paperback goes for $15. A Prime discount would rarely exceed 33%, so it’s safe to assume discounted prices would round off to $10. That’s $5 saved per book. After 12 books, you hit $60 saved yearly.

Given the current $79CAD or $99USD price range for Prime memberships, you aren’t even breaking even. Increase to hardcovers, and you may start balancing out. Maybe.

If a Prime Lite membership existed at half price exclusively for Bookstores, the cost would be well worth the savings. The problem is, this wouldn’t make much financial sense for Amazon. Lite Memberships would be low if exclusively for Bookstores.

That’s why I propose Amazon gives a customizable Lite experience.

How would this work?

• Choose which perks you want. (1 or 2 perks for Lite, Full perks for Prime)
• Enjoy your customized Amazon experience!

It’s really quite simple. If Amazon wants to continue expanding the services they provide (like Whole Foods), then at some point Prime membership fees will ineviably increase. When that happens, users will drop off and seek a cheaper option. Offering a Lite plan for the perks that matter to consumers would be Amazon’s smartest move.

Solution

Okay, let’s recap here.

• Amazon’s Bookstores cater their services to Prime members.
• Prime has mostly online benefits — not useful for off-line consumers.
• It makes no sense for mostly off-line consumers to go Prime, even if they do visit the Bookstores. This will only drive people to not visit Bookstores.
• As Amazon expands into physical, they will need a new Member system.
• A customizable Amazon Prime Lite membership can attract new users and would drive up memberships for off-line consumers.

The answer is pretty clear. Amazon needs to stay true to their online roots of creating a good experience to all consumers, Prime or not. Otherwise, visits to their physical stores will continue to plummet.

After all, what would you do if Whole Foods gave their current prices to Prime members, and a higher price to non-Prime members? BUT, you could order your Whole Foods groceries online for the Prime member price? You’d order online of course!….

Wait.

Was this their game the whole time? To drive more business to their online site? Is this all an elaborate PR stunt to advertise how much cheaper amazon.com’s prices are from list prices? Are we all just being manipulated into ordering online?

…

Find out next week as I dive further into this potential conspiracy.

– Austin Fisher