Amazon Prime: Bigger, More Powerful, More Profitable than Anyone Imagined

Membership in Amazon Prime, which offers unlimited free two-day shipping, has doubled in less than two years. Analysts predict it'll double again by 2017

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Amazon’s competitors — a group that basically includes every retailer under the sun nowadays — have more reasons than ever to fear the world’s largest e-retailer. Membership in Amazon Prime, the service that includes unlimited free two-day shipping and tends to boost customer spending at Amazon dramatically, has doubled in less than two years. Analysts predict it’ll easily double again by 2017.

Last week, a report from Morningstar and Consumer Intelligence Research Partners (CIRP) estimated that there are now 10 million subscribers to Amazon Prime, which offers free streaming of thousands of movies and TV shows and, most important, free two-day shipping on most Amazon purchases. The service usually costs $79 annually, though it’s cheaper for college students ($39 annually, after six months free).

It’s unclear exactly how many Prime subscribers there are at any given time (Amazon doesn’t make this info public), but it sure looks like membership soared. It’s been estimated that there were fewer than 7 million subscribers at the start of 2012 and about 4 million members in the fall of 2011. The numbers have likely been boosted by Amazon including free Prime trials with sales of the Kindle tablet, but even so, the increases are impressive — and are presumed to keep occurring with regularity. The Morningstar report predicted that there could be 25 million Prime members by 2017.

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Even more interesting than the growing Prime ranks is what Prime seems to do to subscribers. A 2010 Businessweek story stated that Amazon Prime broke even within three months of launching, not the two years predicted by its creators. That’s because customers spent as much as 150% more at Amazon after they became Prime members. Subscribers not only ordered more often, but after paying the $79 fee, they started buying things at Amazon that they probably wouldn’t have in the past. Since shipping was always speedy and free, members saved themselves a trip to the store for things like batteries and coffee beans. “In all my years here, I don’t remember anything that has been as successful at getting customers to shop in new product lines,” Robbie Schwietzer, vice president of Amazon Prime, told Businessweek.

The net result of Prime membership — and the thing that has to scare the bejesus out of Amazon’s competition — is that it tends to cause subscribers to stop shopping anywhere else. It’s assumed that Amazon’s prices are competitive. With Prime, shipping costs become a total nonissue. Subscribers automatically defer to shopping at Amazon first because they know shipping is free. And when they spot something they like at another retailer’s site or in a store (yes, it still happens), Prime members are likely to see if Amazon also sells the item. Chances are, Amazon does, the price is about the same or better, and two-day shipping is, of course, thrown in for free.

Sure, Amazon “pays” for all the shipping on Prime orders. A 2011 investigation estimated that the average Prime member used $55 worth of shipping and $35 in digital content annually. That’s $90 total, so Amazon was “losing” $11 annually by collecting its $79 membership fee.

Regardless of what might seem like a net loss, Amazon Prime has been and continues to be a hugely profitable enterprise for the e-retail giant. A Prime member now makes $1,224 in Amazon purchases each year, on average, compared with $505 for non-Prime customers. After factoring in costs incurred for shipping and streaming, the average Prime member yields Amazon $78 more in profits than other customers, according to Morningstar. Yep, it’s nearly equal to that $79 membership fee.

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Wired notes that “Amazon could cut the price by $50 and still make far more than what the company makes off non-Prime customers.” Such a decreased price would probably boost Prime membership through the roof, as more shoppers would find it worthwhile to pay the fee in exchange for a year’s worth of unlimited two-day shipping. “They should be able to give Prime away for free,” says CIRP partner Michael Levin.

An extreme Prime price cut could wreak havoc throughout the retail world. Just imagine if, suddenly, tens of millions of consumers doubled their annual spending at Amazon.com like previous Prime customers have done. Such a change would hammer Amazon’s online and brick-and-mortar competition, and probably also hurt the chances of emerging same-day-shipping services, whose fees fewer would be willing to pay. When two-day shipping is always free, after all, it’s much harder to justify forking over $10 or more to get an item a little quicker. (Amazon also offers same-day shipping in several major cities, and it gives a discount on the expedited service for Prime members.)

That said, there are reasons why Amazon is likely to maintain the Prime fee structure as is. Sure, there are all those millions of $79 yearly fees to consider. That’s easy money for Amazon. And based on expanding Prime-membership numbers, the world’s largest e-retailer doesn’t appear to need help growing its subscriber base.

But there’s more to it than that. From the get-go, many Prime members have been motivated to spend more at Amazon not just because prices were good and shipping was free, but because they want to get their money’s worth out of their $79. If a customer is not ordering all that much, the subscription fee isn’t worth paying. If Prime fees go away, the compulsion to “get your money back” goes away too. When something is free, consumers tend to think it’s not particularly valuable.

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Of course, there are many options in between $0 and $79. Amazon is famous for aggressive pricing tactics, and it has always seemed willing to accept smaller transaction profits so long as it wins the sale. “Your margin is my opportunity,” is a favorite quote from Amazon CEO Jeff Bezos. His company is driven to make more sales and attract more customers, and a cheaper Prime-membership fee would help with both.

11 comments
Danny55
Danny55

By the way, you can read Kindle eBooks and "Kindle Unlimited" on any smartphone, tablet or PC/Mac with Amazon's free software: http://amzn.to/1irka2c

IDontTellLOL
IDontTellLOL

As a seller on Amazon, I can tell you that Amazon waits weeks before sending payment on items sold and delivered. For some reason, they will inform me on my seller account page that I won't make the payment cycle this week or the next week, even after the item sold has been delivered, so they're using the sellers' money for weeks at a time. Imagine the thousands (or hundreds of thousands?) of sellers money they use interest free for weeks. This may be one way they're covering the cost of Prime.

Just FYI

graubart
graubart

I was an early adopter of Prime and a long-time advocate. I started using Amazon (pre-prime) in 1997 and spend more with them than any retailer by a large multiple.

I think Prime is likely becoming more profitable today than it was when I first joined. Then, I received boxes from Amazon several times per week. Today, my family's books are mostly digital; our music is all digital and DVD's have largely been replaced by streaming content. We may go weeks, or even a month, without an Amazon box arriving. But with the streaming video for my Roku, there's no reason to drop Prime.

And while still price-compare big ticket items, the little day-to-day purchases all go to Amazon, including many that I might have bought offline or elsewhere in the past.

RonaldG.Nixon
RonaldG.Nixon

According to another article:

The miraculous illusion of Amazon's free shipping - http://www.thoughtgadgets.com/2012/09/the-miraculous-illusion-of-amazons-free.html#!/2012/09/the-miraculous-illusion-of-amazons-free.html.

"Amazon in 2011 had shipping revenue of $1.55 billion but paid out $3.99 billion in shipping and fulfillment costs, for a net loss on shipping of $2.4 billion. Yep, Amazon lost billions to get goods to your home."

Amazon has a system that is second to none, no argument there. But, as a small businessman, it is impossible to compete with a company that has the resources to lose billions of dollars to force everyone else out of business.

If we buy everything on line from Amazon and most local businesses close due to competition from the giant retailers who sell at a loss until they eliminate local competitors; where are our children and their children going to work? Who will be left to pay taxes to support local communities? Where will our young people get their first all important job? 

JilliePepper
JilliePepper

I've been a Prime member for several years and it has definitely made me far more likely to shop at Amazon than before I was a member.  I do nearly all of my christmas and birthday shopping through Amazon now and am much more likely to impulse-buy a book or or other item when I know I'll have it in my hands in just two days.  Honestly, half the time it seems like the package arrives in just one day. 

Amazon provides amazing service and the website is very user-friendly. My husband and I use the free streaming TV and movies very often and also will pay to "rent" digital movies and shows from time to time (more expensive than Redbox, but it's worth it not to have to leave the house).  I'm a very happy Amazon customer and strongly recommend Prime membership!

wisep01
wisep01

 How do you know that amazon prime doubles spending? Is there longitudinal data present that compares the same purchaser's spending levels pre-and-post prime membership? What is the empirical basis for your claim?

mandycat
mandycat

I'm an Amazon Prime member and, obviously, a frequent Amazon shopper.  But I never assume that Amazon has the best price on everything.  Frequently it does but I've run across startling differences in Amazon prices and those available elsewhere.  As always, it pays to compare. 

formerlyjames
formerlyjames

Very timely article for me as I was just thinking about signing up.   I am loyal to Amazon since my first purchase with them.  I know of nothing they don't do better than the competition.  The loss of tax breaks, which I sure enjoyed is not their fault but state governments, some of which are Tea Party driven, lookin' at you Texas.

thelegaldreamteam
thelegaldreamteam

@IDontTellLOL YEAH NOW LET'S TALK ABOUT PAYPAL AND EBAY, I MEAN BERNIE MADOFF AND BONNIE & CLYDE. THEY ENCOURAGE DISPUTES, 10 DAYS OF ROBBING PETER TO PAY PAUL SKIRTING EVERY FINANCIAL LAW IN US HISTORY, HIDING OUT IN DELAWARE HMMM I NEED TO LOOK INTO DELAWARE REAL ESTATE. BUT, WE ALL KNOW IF BIG BROTHER DIDN'T COVER FOR BIG SISTER, WELL, IT WOULD BE LIKE NICK AT NITE, OFF THE AIR. AT LEAST IT'S NOT JERRY SPRINGER, ALTHOUGH THEIR PHILLIPINO OUTSOURCING IS REALLY OFF THE CHAIN TOO FAR. I MEAN I HAVE SOMEONE IN A THIRD WORLD COUNTRY TELLING ME WHAT I CAN AND CAN'T DO IN AMERICA, ALL WHILE WAITING AN HOUR TO BE DEMEANED, I THINK NOT. YOUR FIRED. FOR THIS REASON ALONE, AND DOZENS UPON DOZENS OF OTHERS, I'LL EAT EVERY SINGLE TINY EENIE WEENIE HEADACHE WITH AMAZON OVER DOWNING A BOTTLE OF EXCEDRIN WITH EBAY/PAYPAL.FROM EXPERIENCE. I'VE LOST 2X IN HEADACHES JUST BY THE BOLOGNA BUYER PROTECTION SHAM. TALK ABOUT MARKET MANIPULATION, THEY FINANCIALLY FEED THEIR DAILY DEALS AND FAVOR BIG SELLERS. IF YOU AREN'T SELLING YOUR STINKING SHOES OR SANDALS, THEN YOU ARE FINISHED, LITERALLY. AT LEAST AMAZON GIVES EVERYONE A FAIR PLAYING FIELD, WHICH MEANS IF YOU HAVE THE GIFT OR SKILL TO BUY AND SELL BETTER THAN THE NEXT, YOU ARE THE NEXT! THIS IS SELDOM TO BE FOUND THESE DAYS, ANYWHERE! FYI DID YOU KNOW SOMEONE CAN LEAVE YOU COMPLETELY FALSE LIABOUS FEEDBACK AND NEVER HAVE EVEN BOUGHT OR PAID FOR YOUR ITEM? YEP, ONLY IN THE WORLD OF OZ, I MEAN EBAY. ONE FINAL THOUGHT, THINK ABOUT BUYING SOMETHING GENUINE? DON'T, THEY LITERALLY PUSH KNOCK OFFS. HERE'S WHAT I WAS TOLD "AS LONG AS YOU INFORM OR EXPLAIN SOMETHING TO BE A KNOCK OFF OR REPLICA IT'S OK" YOU MUST DISCLOSE EVERYTHING TO YOUR BUYER. HMMMM WON'T BE DAILY DEALING ANY HANDBAGS THIS WEEK, OR AT LEAST ON EBAY. 

thelegaldreamteam
thelegaldreamteam

@RonaldG.NixonTHEY CAN ALWAYS GET A JOB AT AMAZON.


AMAZON IS A MARKET PLACE, DON'T FEAR MARKETS. LAST PERSON FEARING MARKETS DESTROYED THEM EVEN FURTHER TO THE POINT OBAMA CARE. MARKETS ARE ALWAYS HEALTHY IF AMAZON CAN'T HOLD THEIR OWN, THEY WILL FOLD, AND NOBODY WILL BE THERE TO BAIL THEM OUT. BUT IF THEY SUCCEED, WHICH THEY OBVIOUSLY WILL, NOT ONLY DO YOU HAVE A JOB PACKING AND SHIPPING, BUT YOU'VE RECEIVED A FREE EDUCATION AS WELL!

thelegaldreamteam
thelegaldreamteam

@wisep01 THE FACT THEY ARE ON THEIR FINANCIALS CLAIMING BILLIONS IN LOSSES MEANS THEY SEE THE LIGHT, DO YOU?