Compete Blog: Amazon Prime Members Are Located in Aisle 5
Through a special arrangement, presented here for discussion is an excerpt of a current article from the Compete Blog. Compete Inc. is a web analytics company that focuses on understanding how consumers use the internet.
The rate of adoption of Amazon Prime, coupled with the growing reach of Amazon.com, has caused rivals to scramble to offer alternative programs and initiatives to stay competitive. Competitors fear that Prime dramatically lowers members’ shopping activity on non-Amazon websites.
For $79 a year, Prime members receive unlimited two-day free shipping on eligible Amazon purchases (with no minimum order size), as well as access to Amazon’s video-on-demand service, Amazon Instant.
What can we learn from the shopping behavior of Prime members, both on and off of Amazon.com, and how do their online shopping patterns differ from that of non-Prime members?
Compared to other shoppers on Amazon.com, Prime members return to the site three times as often and spend nearly two hours on the site each month, albeit some of this time is spent watching videos. In addition, Prime members’ purchase propensity (or likelihood to purchase on Amazon in a month) is 78 percent, compared to just 18 percent among non-Prime visitors to the site.
One might expect that the ease by which Prime members quality for free two-day shipping would dissuade them from building "baskets" on Amazon, in favor of making purpose-driven, one-off purchases. While the total value of Prime members’ Amazon orders are indeed 17 percent lower, Prime members actually purchase 11 percent more items per order than non-Prime shoppers. They are also still willing to pay for shipping, and do so on 39 percent of their Amazon orders, as a result of purchasing items that do not qualify for free shipping (sold by other sellers), or their opting for expedited shipping.
Despite the $79 fee for shipping perks, Prime members do not show a significant difference in their propensity to shop on rival websites. For example, 19 percent of people online in January visited Target.com, compared to the 20 percent of Prime members who visited the site.
In fact, when actually shopping, Prime members’ consideration of rival retailers considerably exceeds that of non-Prime members. Thirty-one percent of Prime members shopped on both Amazon.com and Walmart.com in January, compared to 24 percent of non-Prime members on Amazon.
Amazon Prime generates an enviable stream of subscription revenue and sales for Amazon. It also enables Amazon to trumpet higher usage stats for its Amazon Instant service that comes with the service. But it doesn’t appear to be doing is building a wall around Prime members. For rival retailers, Prime members are up for grabs and are in fact coursing through their virtual aisles in an attempt to find the best deal.
Discussion Questions
How much does Prime membership sway customer loyalty to Amazon? How is its popularity changing the online and offline path to purchase for its many members? What can other types of retailers learn from Prime’s popularity?
Once I paid for a membership at Sams Club, I felt a “personal obligation” to shop there more often, to justify or recoup my membership fee. Certainly Amazon Prime members have similar feelings. But in addition, to justify the fee, I am also certain that these members were already inclined to spend big dollars with Amazon or they would have not invested in the membership.
Imposing membership fees is not suitable for every loyalty program, as some are not in position to add sustained added benefits and value to those who pay a fee. Big Y (in the supermarket sector) is the one grocer that I am aware of that offers a tiered loyalty program (with fees), but they have also made the commitment step up the perks to provide justification of the fee.
I do believe there is upside for more established loyalty programs to look at adding a fee-based tier, but careful assessment of the increased loyalty and spending versus the investment needed for addition perks is warranted.
Amazon Prime is like paying for membership to Costco; consumers pay for the right to shop. For their entry fee, consumers get free two-day shipping, sometimes, and access to Amazon video-on-demand, which has some older movies and TV shows available to stream for free.
Amazon was smart to offer Prime. Consumers hate to pay for shipping and hate to wait. So, if you pay $79 a year, Amazon eliminates this hurdle, provided you buy from Amazon and not an affiliated vendor. This annual fee makes sense, if you shop frequently and/or if your order size is under $25, the order size that, if you buy directly from Amazon, triggers free shipping.
Amazon has such a wide variety of items for sale a consumer can almost always find what she is looking for. Few retailers, even Walmart, can do this. That said, free shipping for yearly membership fee might make sense for a retailer with a broad line of products or with merchandise that consumers purchase regularly (diapers, dog food, etc.).
The key metrics are in the table ” Likelihood to purchase on Amazon in month.” Amazon Prime members visit 3 + more times per month and their purchase propensity is 4 + times higher than non-Prime shoppers. One should not conclude that the higher cross shopping numbers for Amazon Prime members is a negative thing. Amazon Prime members are shoppers period.
Lesson learned for competing retailers: develop customer intimacy and your customers’ solve problems better than anyone else.
Prime membership generates a very significant loyalty for Amazon. The $79 one-time per year fee works well psychologically, even when not so much, economically.
Consumers feel that they have joined a club, or made a one-time investment, and therefore they feel that the shipments are “free.”
Consumers hate shipping fees so Amazon Prime makes shipping fees a consumer “issue” just once, if even then, for the once-each-year fee.
The one downside of Amazon Prime for most consumers is that there are still so many products not offered on “Prime.”
For me, Prime is like crack. I always start with Amazon. I will still VISIT other sites, just to confirm I’m not overpaying by much, but as long as the prices all-in are close, I’m going with Prime, because Amazon is so insanely fast. No one else comes close.
In fact, I had a surprising experience the other day. I’m generally a pure B&N eBook person, partly because I had a Nook (I’ve moved on to iPad). But for some reason, this one time, I went to Amazon first to look for a book—since I have the Kindle reader app. I then went to B&N and discovered Amazon was $3 cheaper. On an $11 book that’s real money. It appeared I got that price because I’m “Prime.”
What can other retailers learn? Loyalty is earned in a variety of ways…insanely quick free shipping (vs. the slow boat from China) is a big part of that loyalty.
Well, I can certainly speak to my own personal experience. My husband worked for the University of Colorado for several years, and with that came a .edu email address—and free membership to Prime. When he left the university, we had all of a week before we looked at each other and said, “We need to buy Prime.” All of those annoying monthly trips are taken care of with subscription services, my kids hardly watch TV any longer thanks to Instant Play, and there is hardly a time when we’re buying something that we don’t stop and say, “Wait. Have we checked Amazon?” And don’t forget that if you have a Kindle and you’re Prime, you get hundreds of thousands of books for free too, from Amazon’s lending library.
I do all of this knowing that it drives my store-based retail friends absolutely mad. Sometimes I even feel like I’m betraying my own kind. And yet… Half the reason Prime works is because of things most other retailers can’t compete with—like the digital side of things. And only on the rare “I must have it now” situation do we look to a store first, so don’t think that there’s an enormous value to immediacy.
The only areas, at least for me, where all of the above does not apply, though, is fashion and fresh food (shelf-stable food, you’re going down soon). But if you’re an apparel or grocery retailer, if you think Amazon isn’t a threat, think again. To dominate fashion, all Amazon really has to do is offer an upgrade to Prime that gives the shopper free returns. It really is a force to be reckoned with.
Many of Prime’s members were likely loyal Amazon customers before they purchased a Prime membership. What joining Prime did is provide them a reason to become more exclusive.
It removed the shipping cost barrier and provided a rationale as others have pointed out similar to joining BJ’s, SAM’s, or Costco. I have already paid the entry fee, I might as well use it. For this to be effective for them, other retailers would have to offer frequently purchased relatively low cost items.
Amazon’s very smart move was to offer Prime free to students. After four years of enjoying free shipping and added perks like video downloads, Amazon’s younger clientele is seemingly in for life, much as McDonald’s has trained small kids to crave a Happy Meal toy. It’s not hard to imagine how other retailers could create this kind of relevance…but will they be willing to?
I’d like to add a UK perspective here. Amazon.co.uk offers a similar Prime membership, albeit without the video-streaming feature. Amazon UK Prime offers next-day delivery which is very compelling, especially in the UK where free shipping is far less common than in the US, and typically comes with a minimum purchase of £30.
However, contacts within my network at Amazon tell me that Prime members spend quite a bit less per transaction than non-members (in the order 40% less). It was felt that this was as a result of member attitude that there was ‘no need to build a basket’ and so members rarely added a 2nd item before checkout. Due to this, they were considering changing the terms to offer a lower-cost option which would bundle free shipping goods into a weekly delivery. To date though, this has not been piloted.
What do people think of this idea? Would it have the desired effect of reducing 1-item shipments?
I became a Prime member to save on shipping, but frankly stayed because of convenience and dependability. While I do my best to shop local, there are many staples and other products that you can’t beat the price and selection from Amazon.
Because Amazon sells so many products and such great prices, I can’t imagine that I would sign up for a Prime membership with other retailers. So while others might consider doing a Prime approach themselves, the challenge will be to offer something that would move satisfied customers like myself to join.
Another interpretation is that Prime shoppers are more frequent internet shoppers than non-Prime shoppers, as evidenced by their willingness to spend money to buy a membership. It follows from this interpretation that Prime members will then be more likely to visit non-Amazon shopping sites. Prime does not necessarily buy Amazon loyalty in the sense that Prime member will spend more for items on Amazon. What it does provide Amazon is inclusion in the price comparison.
Rather than Prime subscriptions being an “enviable stream of subscription revenue,” the exact opposite is true: Prime creates losses. It just happens to be a loss leader that pays off due to the uniqueness of Amazon.
Piper Jaffray estimated Amazon loses $11 per customer on Prime, part of the reason Amazon takes in $2-3B less in shipping costs than it spends.
Amazon ends up a winner due to selection. Amazon offers SKU breadth due to its own products and those from merchants in the marketplace. Amazon is increasingly adding to its video inventory with content deals and in-house production. Amazon has a special base “primed” to buy new services such as streaming music.
Free shipping + video may have appeared illogical at first, but so did cell phones + cameras 10 years ago. Only retailers with wide selection and funding for losses from operating loyalty programs need apply.
I shop Amazon a lot, but very rarely pay for shipping. That’s not because I am a Prime member, but because I am able to use Amazon’s super saver free shipping option on almost all my orders. And my purchases usually arrive in 2-4 days anyhow. Why on Earth would I pay the upfront fee?
I do think as Cathy suggested above there is some generational play here in terms of loyalty. My youngest friends (who can least afford the fee) all belong to Prime. My older friends, not so much—even though (like me) they are avid online shoppers. Many internet shopping sites offer free shipping now if you look closely enough and if the item or total order is priced at a certain level, so clearly they have concluded that free shipping drives sales.
The number I care about the most is the number of Amazon prime customers. I don’t see that here. Anyone know if they signed up 5% or 50% of customers? For Costco it is 100% for loyalty card signups, for grocery it is also a high percent of shoppers…we need to compare Amazon. Is it like those ratios or paywall ratios (which are maybe 10%)?
Amazon Prime: Icing on a tasty cake!
Like others, I signed up for Prime because of the free shipping but find myself using it because Amazon is convenient, easy, stocks most of the items I want and I don’t have to waste time and energy (at least physically) going somewhere to get the items. Prime is a valuable service, but coupling it with the rest of Amazon is where the value really comes together.
Amazon Prime does not eliminate visits to competing sites. After all, the customers who enroll in Prime tend to be the most highly engaged e-commerce shoppers, and as such, will explore other sites frequently. At the same time, what AP does is to influence the final purchase decision. Instead of shifting share of visits as much, what AP does is to shift share of wallet, which is a very important metric.
Amazon has built on the popularity of Prime for e-commerce and added additional “attractions” such as streaming videos, which not only steal share from Netflix, but also lead customers to stay on the Amazon site longer, which leads to incremental transactions
Other retailers should note that Amazon is focused closely on share of time and share of wallet as key metrics. You cannot determine those from a single visit; rather, these metrics evolve over time as you prove your worth to your customers over and over again.
No one with short-term thinking would even have sacrificed so much margin with Prime—think about it!
Paying $79 for prime as suggested by Mark, does make me obligated to shop on Amazon more to get the value of the money I’ve invested in prime. However, this does not stop me from visiting other retailers for my other needs. Retailers who play on uniqueness have a value proposition on their own; I would visit them despite the prime membership.
I have Amazon prime and it does help make with shopping decisions because it encourages convenience ordering, and just like a Costco membership, makes you feel like you should use it to “make it worth your while.” It also helps set a baseline for length of time for delivery which makes it easier for consumers not on a deadline to pick Amazon versus driving to store.
Amazon is becoming the most powerful (or is it a fait accompli?) ecommerce site among Generation Y. Ask anyone you know in that age group what gift card they find most valuable and they will say “Amazon”.
The one data point in the article that is not clear is the total wallet spend of Amazon Prime members at online retailers. The fact that they visit other retailers online may be indicative of their high spendings levels overall, less of an indicator that Amazon has not created a strong enough fence around their activity.