危 wēi danger
Retailer loyalty programmes fall in and out of fashion. Their supporters describe increased customer stickiness (particularly for retailers that become known for value in price-sensitive markets), increased average spend per customer and valuable data aggregation for market research on shopping habits. Tesco clearly believes in these benefits as it relaunched its Clubcard last summer, leading to an increase in scheme members to 15 million. However, the schemes are expensive to launch and run: Clubcard’s relaunch cost c£150m. In addition, as referenced in this Marketing Magazine blog, Tesco is quite unique: it sees data frequently and across many items, is able to change its offer using that data and can sell the data to its suppliers, turning a cost-centre to a revenue centre. Given the high costs and uncertainty of benefits Amazon would surely be crazy to launch a loyalty programme open to everyone in a similar way?
机 jī opportunity
Maybe not. Keith Melker, my friend from HBS, recently brought to my attention a slightly counter-intuitive trend in the introduction of ‘paid’ loyalty programmes in the US, and helped me understand why they’re often smarter than they appear.
Amazon Prime, launched in 2005 is one such example in which members enjoy unlimited free shipping with no minimum purchase amount. But, instead of giving membership away free Amazon charges $79 per year.
Superficially you might expect this to be taken up solely by Amazon’s most frequent customers and that the programme would be loss-making because those customers place frequent orders (which Amazon would have to foot the shipping bill for). But that assumes that customers don’t change their behaviour as a result of being a Prime member and a quick scan of various blog posts suggests that they do. In fact anecdotal evidence suggests that Amazon’s customers go from about $160/yr to $600/yr after they buy Prime. It appears that once customers pay for Prime they begin to order more (perhaps because they feel that they’re beating the system). So, assuming the combination of the Prime charge and the increase in margin per member is greater than the value lost through free shipping it’s a business masterstroke. Had Amazon given it away free the uptake might have been greater and the behaviour change might not have been as dramatic: that could have been hugely expensive.
How About…
- Re-examining loyalty programmes – perhaps deliberately offering it to a select group (rather than everyone)?
- Or even charging for it if it might drive positive behaviour change?
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5 Responses to “61) Amazon Prime”
Rob
Tom – not sure this gets to the heart of what is smart about Prime. Prime is about pushing volume through the platform, and there are a range of benefits.
As a year-old Prime member, I cannot now imagine buying something at any online store without checking first to see if I can get it on Amazon. The promise of free shipping means I have diverted several thousand dollars of spend away from other net retailers over the last couple of years.
Clearly Amazon benefit from increasing their share of my wallet, but what about the cumulative benefits of lots of customers sharing my behavior? This centralization of online purchasing gives Amazon powerful leverage over any online retailer. Its not difficult to imagine that in a couple of years from now, any retailer worth their salt (and not just the limited collection of Mom&Pop operations that exist today) will have to have a presence on Amazon.
Amazon is smartly managing its way from being a store, to being a platform.
Tom
Rob – good to see you here!
I completely agree with the volume argument – Prime undoubtedly gives Amazon greater share of wallet – that in turn will give bigger volumes and richer data.
What I found interesting is the assumption that Amazon is loss-leading with Prime to get there – it actually looks like it shifts behaviour enough that Amazon captures more profit (rather than just more sales)
i.e. if Amazon offered Prime for free it would be taken up by more customers, it might generate a few more sales but consumer behaviour wouldn’t change as much so Amazon wouldnt capture as much profit…
I wonder what Belsham would say?
Rags Srinivasan
Once they pay the Prime fee it must be treated as sunk, that is if we are all rational. Since we are not we focus on the sunk cost and think we are getting the most out of it by ordering more stuff. I am not Amazon Prime customer but I bet Amazon must be telling them each time how much they saved on shipping (but will not tell them the total saved so far).
I also bet orders peak near the end of the period.
By the way, by my calculation Amazon had 3.44 million Amazon prime customers in 2007 ( i stopped calculating after that)
-rags
Tom
Hi Rags
That’s a great point – it would make sense to send the [irrational] consumer regular updates on how much they’ve saved outside of the platform. It would encourage us to visit the site to beat them up further!
BTW – great blog on pricing!
Ken Oatman
This is semi-off-topic, but…
I have a philosophical problem with the extreme consumerism represented by Prime. I tried out the trial, then started thinking about the ecological impact of having my gadgety impulses AIR-FREIGHTED to me willy nilly.
I know we’d rather discuss consumer loyalty programs here, but we’re in an idyllic moment in history where we ignore planetary costs of behavior, and chat idly about it. Stop and think twice about your impact …does Amazon Prime or excessive consumption or expedited freight need promotion?