Membership in Amazon Prime—the online retail giant’s packaged service that includes free two-day shipping on all orders, free streaming of online movies and TV shows, and one free Kindle book to borrow monthly—costs $79 a year. It’s estimated, however, that Amazon spends an average of more than $90 annually per customer to supply all of Prime’s services. That’s a net loss of at least $11 per customer, adding up to hundreds of millions of dollars in annual losses for Amazon.
Amazon foots even more of the bill for students and moms enrolled in Amazon Prime. Students get Prime for free for six months, and pay $39 annually thereafter; mothers (any caretakers of small children, really, so as not to exclude SAHDs) enjoy Prime membership for free for three months, and additional months of free two-day shipping are possible for customers who order $25 worth of merchandise in Amazon’s baby section—for up to a full year of the service free.
Why is Amazon so willing to cover the costs of shipping and other services of Prime members? And why is the company constantly expanding the services, and pushing for more members for a service that seems to lose money?
The answer is that, in the grand scheme of things, Amazon Prime does not lose money. It helps Amazon dramatically increase sales and creates legions of loyal customers at the same time.
A SmartMoney writer recently chronicled the personal effect Amazon Prime membership took on her, turning her into a “shopping machine.” After joining the service, her spending at Amazon tripled—to $1,274 during an 18-month span.
In light of figures like that, it’s no big deal if Amazon “loses” a measly $11 a year on each Prime member.
The SmartMoney story notes that the problem, from the consumer’s budgetary standpoint, with Amazon Prime is that it makes shopping too darn easy:
“It’s very dangerous!” says Nick Holland, a mobile-payments analyst with Yankee Group. The genius of Amazon — beyond the reliable service — is that it gets folks through checkout too fast for them to reconsider an impulse purchase.
Once the annual membership fee is paid, there are no pesky shipping fees to consider either, which might otherwise cause a shopper to rethink a purchase and abandon the items in an online shopping cart. The absence of shipping fees, and added-value services such as free streaming and e-book borrowing, are meant to induce consumers into making a habit of heading to Amazon for a greater share of their shopping and entertainment needs.
Amazon Prime targets students and moms in particular because they are young, vulnerable, and especially likely to get hooked on the service—and become lifelong loyal customers.
A Wall Street Journal story investigates why it’s so worthwhile for Amazon to cover some of the costs of its Prime members—who incur, on average, $55 a year for shipping and $35 annually for digital content via streaming.
Prime is only a few years old, and it added streaming features and free e-book rentals only in 2011. Yet Prime members’ spending at Amazon already accounts for a whopping 40% of the company’s domestic revenues.
Prime members, clearly, are among Amazon’s best customers. It’s in Amazon’s best interests to cover a few of their expenses, with the understanding that these customers will be more than paying Amazon back.