Can Amazon Prime stay prime?
Patrick Campbell Apr 29 2021
This week, we are talking about the greatest subscription in the history of humankind. It's one of those things that not everyone thought of as a great subscription. Now, it's turned into the business case study of business case studies. And of course, we are talking about Amazon Prime.
What's beautiful about this is they're doing some things well. And a couple of things they probably could be doing better. But I wouldn't bet against them. We're going to wrap up all of these learnings, all the data that we collected and put it into an excellent little case study. So you can take this knowledge and make sure your monetization strategy stays on the right track.
Watch the full episode
Amazon Prime's success hinged on attacking the first principles of mass-market ecommerce: find anything, at the best price, with the quickest shipping time. This supreme focus has led Amazon to nearly $300 billion in annual revenue, a market cap in the top five companies, and over 120 million different Amazon Prime members. But can Amazon use Prime to expand the share of wallet with consumers to keep their reign?
Below are some valuable takeaways you can implement in your own business.
- Membership models push for more of a mission metric.
The mission metric concept is about understanding your customers’ needs and what performance they’re after, and then making sure your membership model or pricing strategy pushes for more of that mission metric. You must understand which features or bundles you can put together to help your mission metric.
- Niche down when you have a fragmented market and focus on high-value segments.
There are some high-value segments that Amazon could double down on. Create new, niche bundles based on these high-value segments of customers.
- Go up the value chain as an advantage.
In Amazon’s case, they’re solving the single storefront problem. And they could close the loop by offering some sort of storefront to ecommerce brands. Find where you can use your leverage to make sure you're pushing your product to the people you're trying to get to, so you can get more of that mission metric.
Businesses should think through the mission metric they’re trying to get to or trying to optimize, and find some out-of-the-box actions to take that will push their mission metric forward.
The internet brings us closer and closer than ever. Not only can we speak to anyone or learn anything at the touch of a button, we can also buy anything and everything—from equestrian supplies to furry jumpsuits, to hanging out with friends. And one company made this possible—Amazon.
Founded in 1994 by Jeff Bezos, Amazon started out as a Bezos bet that the internet would spread rapidly and give us a future of everything at our fingertips. So, he quit his finance job and moved to Seattle to launch, initially, the world's largest bookstore. Building the infrastructure and website was expensive, but within two months of launching they were pushing $20,000 in books every week. By 1998 they added music and other media before constantly expanding their product line to over 12 million in endless categories—everything from A to Z.
Amazon ran into a problem though—reach was one thing, but speed was another. Why would I want to buy something and have to wait two weeks for it when I could go get it now, even if it was a little more expensive? So Amazon’s second pillar of success was shipping as many products as possible, as quickly as humanly possible. The approach was successful, as they found those who got their items quicker would buy more. Yet, shipping was expensive, so it was hard to know if they could guarantee speed because of all the costs.
This is when Charlie Ward–an engineer at the time, and now VP of technology—suggested,” “Wouldn’t it be great if customers just gave us a chunk of change at the beginning of the year and we calculated zero for their shipping charges the rest of that year?”
Everyone questioned if this was crazy, but it was the birth of Amazon Prime—then codenamed Futurama—which morphed into a service you paid $79 per year, now $149 per year, for two-day, free shipping on all Prime items. You also got discounted one-day shipping, grocery delivery with the Whole Foods acquisition, Amazon’s streaming service, Amazon book deals, and a whole host of other benefits.
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Amazon Prime's success
Amazon Prime’s success hinged on attacking the first principles of mass market ecommerce—I need to know I can find whatever I need, at the best price, at the quickest shipping time. Amazon centered on all of these things and then created a needed lock-in with Amazon Prime that implicitly committed users to wanting to get the most out of their purchase of the membership. This supreme focus on first principles has led Amazon to nearly $300 Billion in annual revenue, a market cap in the top five of all companies, and over 120 million different amazon prime members.
But with all this success comes a lot of competition. Amazon isn’t the only one selling things online and when you look globally they’ve been challenged by AliBaba, Walmart, and even Shopify who claim they’re “arming the rebels” of every small business selling online against Amazon. The Amazon Prime membership has also lost some of it’s touch when these competitors can easily deliver within a reasonable window, with some critics arguing that at some point the difference between same-day shipping and two-hour shipping doesn’t really matter.
Other critics point out that the hodge podge of features in Amazon Prime aren’t conducive to ensuring international audiences latch on to Amazon much like American audiences have, and even the shifting culture will guide consumers to other services.
The question remains though: How can Amazon use Prime to expand “share of wallet” with consumers to keep their reign as the monarch in the ecommerce wars? Can Amazon use Prime to stave off their competitors and figure out how to internationalize without losing that which made them? Will Amazon simply need to diversify their offerings as they’ve done with AWS to increase revenue? Keep reading.
Using Amazon for everything
I've been using Amazon Prime since college for a long time. It's as simple as it can be. But still, the value's incredible. I think the problem here is there are so many things in Amazon Prime.
I don't know what I use and don't use, that's Amazon Prime related. I look at Prime Video every so often. It's on the list when I'm looking for something to watch, and I'm sure there's a bunch of other things that I'm using. But that's the beauty of Amazon Prime. It's unlike a Costco membership, which is just your ticket to get in the door. Amazon Prime's entire objective, which is beautifully outlaid and the whole aim of Amazon is to get you using Amazon for as many things as possible, leading to purchases.
I use it for buying anything retail. And I'm probably not going to price compare that much, if at all, unless I'm shopping for a specialty product. When I look at something like Prime Video, I don't exactly know how that leads to buying more toilet paper. But I'm into Amazon. I'm associating the brand with Amazon. And so, maybe that's not a direct play, but it's at least an indirect play, and it makes me value the Prime membership even further.
So, the big takeaway for most businesses is that they're going after a mission metric. A mission metric is a goal you’re trying to achieve for your customer. Amazon's mission metric is average order value, as well as the number of orders. And they found pretty consistently that Prime members are doing double the amount of orders per month than non-Prime members. And the average order value is, I think, $2 to $5 higher.
That proves the thesis that it's impressive. And more things are happening when it comes to Amazon. You're buying more stuff and getting washed over with the brand. And this is why it's so vital to have that mission metric. Amazon knows what they're trying to optimize for. And they're ruthless about solving the issues that get in the way.
Amazon is a pricing company
Amazon has become a logistics company. They've become a pricing company. They are always after the low prices. They've become an infrastructure company, and that spun off AWS because they were like, "Why are we spending this money that we then have to pass onto our customers with the retail product?"
Tackling complex problems gives you leverage. Amazon has so much influence right now because they've tackled some of the most complicated challenges. And I think they use that leverage well. Although some people would disagree with this—some warehouse laborers—but I think they use it benevolently.
I mean, when you think about it, they're all about lower prices. I don't price shop because I use Amazon. They've made that commitment and they've won that enough. There are probably some things that I'm paying more for than if I went to Walmart or some other place. But I don't even know because it's not even worth my time.
We saw this especially this year with COVID-19. Amazon said: "Hey, that $4 billion of profit, we're going to reinvest that into creating the cleanest, most secure virus-free logistics network." This is something that's not only going to help them, obviously in the kind of mirror of COVID, but it's also going to help them into the future. Customers are confident the products they get are clean.
Customers don't have to worry about cleanliness. So they can just buy more and more, and more. And they might as well buy it from one place that makes it easy and makes it cheap.
First up, don't be afraid to over-bundle. This is not a very nice-looking pricing page. It's not amazingly designed. It's super simple and Amazon is known for that. It's not the most beautiful thing in the world, but it's to the point. And that's good for logistics, if that makes sense. It's utilitarian.
It's free delivery, award-winning movies and shows, a bunch of songs, two-million songs—these are the main things. But I think that there is an insane amount of things at Amazon Prime.
When we go to this particular list, I'm not even going to be able to count the bullets in a short enough amount of time, but there are so many things that I don't think most people are aware of. There's First Reads. There's Prime Reading, Amazon Elements, Prime Early Access, deals and discounts compliments of the Amazon family, Personal Shopper by Prime Wardrobe, Amazon Prime Store.
There are so many things. I'm not going to read the rest of them. I've already read enough of them. So we know it's not a question of value. Amazon's customers aren't asking: "Does the amount of money we spend on Prime equal the number of things in the subscription?" It's not that shortsighted.
And from Amazon's perspective, it's like, "Hey, maybe we cover the cost. Probably not, but maybe we cover the cost. And then all the other purchases, that revenue and that profit is gravy."
If your business has a membership plan—which I suggest most companies should offer at some point—make sure you're unblocking those things or at least encouraging the activity you seek. In this case, Amazon wants you to buy more stuff. Here's a bunch of reasons why you should buy this stuff, and here are a bunch of barriers torn down to make it easier to buy that stuff.
One takeaway from their pricing page is this: your pricing page doesn't need to be beautifully designed. It doesn't need to look like some Apple product or something like that. The Amazon pricing page is super utilitarian. It tells you what you're getting, shows you the value propositions, it makes it super clear and straightforward. It's a lot like we talked about hey.com a little while back. And their Basecamp pricing page is also very similar and super simple.
Now, that's not necessarily the thing that makes people convert. Simplicity is key. They handle the objections. They handle the value. And that's what—even if you don't have a beautifully designed page—wins some awards. You have to focus on simplicity. There are plenty of beautifully designed pages on the internet that customers don't understand.
Let's look at the data.
You're about to see something called a value matrix. We collected data from the group comparing feature preferences and plotted those on the horizontal axis, more valued features on the right, less valued on the left. We then collected willingness to pay for the overall product and plotted that based on their number-one feature preference on the y-axis. Analyzing data in this manner allows us to determine which features are differentiable add-ons, core, or commoditized for each segment.
Membership models push for more of a mission metric
We've talked about this a lot in the past, both in this episode and some other episodes. But there's this whole concept of a mission metric. It's about understanding your customer's needs and knowing what performance they're going after—and then making sure your membership model or just your whole pricing strategy pushes for more of your mission metric.
We can see this with Amazon, with all the different features they include.
What's kind of fascinating is, there's not one thing that knocks this out of the park. Yes, some features are more valued than others—things like Prime Video, free same-day delivery, free two-day shipping, etc. But the differential in terms of willingness to pay isn't huge.
There's not one thing that is a picture-perfect add-on or is something that Amazon should differentiate. They're all within this band. And it's this plus or minus 10 to 20% when you're looking at this type of data and the willingness to pay—the Y-axis. And when I see this, it's an argument depending on what you're trying to do. If you're a B2B product, I would say, yes, you should still differentiate and do add-ons. But if you're a membership model, throw those things in there.
Just get them in there. You'll have a bunch of entry points for these folks discovering: "Oh, I didn't know I get that with Prime, I should sign up for Prime." And then, some Prime members think, "Oh, I'm going to look at that list because there are probably some things I'm not using that would be valuable." And then we're spending more money with Amazon, which makes Jeff Bezos and Amazon's shareholders happy.
The takeaway is: you must understand which features or which bundles you can put together to help your mission metric. And you want to be careful. Ask yourself "Do I want to differentiate these into different, higher-end tiers? Or do I want to bundle these together because they're going to get me more mission metric?"
The craziest takeaway here to me is the difference in willingness to pay between free one-day or free same-day shipping. If you looked five years ago, free two-day shipping would be such a value driver, maybe even an add-on. But I think it's expected at this point.
So think about Zipcar, all right? Zipcar, one of the biggest things that they discovered, is that the higher the density of cars, the more likely you were to use Zipcar. Uber discovered this. Lyft discovered this. It was a game to get as many vehicles as possible into a region. Similarly, the sooner you get stuff from Amazon, the more things you're going to buy.
Because if it's like, "Oh, I get that today?!" I remember a couple of weeks ago, I was looking for some cables and I looked on Amazon, it was one-day delivery, I was like, 'Cool.' But there was one that wasn't one-day delivery and I went to Best Buy. And I think that as Bezos closes that gap in Amazon. This is where it gets a little creepy, just sending customers products before you think you need them. It feels really creepy and probably will backfire somehow, but there's a world where that's going to start happening.
Suddenly, I'm going to start buying more stuff, especially when you send me stuff to try on or stuff to look at without even charging my credit card. Which I think is a fascinating world, as long as you can get over the, let's just say, creepiness factor.
It's like living in the Jetsons.
Niche down when you have a fragmented market and focus on high-value segments
Amazon could improve and optimize one area: niche down when you have a fragmented market and focus on high-value segments. So, we've talked about the value matrix. Everybody has a willingness to pay that fluctuates a little above the median, but nothing crazy. They do have some segments that have a much higher willingness to pay.
You can see here, like Fashion Focused and Foodies. There's an opportunity to go deeper there. I think Amazon Family has potential—especially families with children. That's a no-brainer. Get diapers going. Get the baby food going. And Business, I think, is pretty intuitive. They do have a separate Prime bundle offer for businesses. One thing I think Amazon could do well is some sort of discounted, all-in bundle for the first year of your child's life.
Going up the value chain as an advantage
The final thing here, which I think is a bit aspirational where Amazon could do better, is going up the value chain as an advantage and solve, what I like to call, the single storefront problem.
When you think about both Shopify and Amazon, Shopify has handled the storefront for all of those consumers. They're lagging on the logistics because they're not going to have a logistics engine like Amazon, at least anytime soon. They're trying, though.
They're also lagging on different aspects of selling. It's fascinating that Amazon could close the loop here by offering some sort of storefront so that any ecommerce brands could have its branding, and look and feel, but keep everything on the backend. Keep Amazon payments, Amazon logistics, Amazon shipping, fulfillment. Even fulfilling, like finding the product in wherever warehouse that needs to happen, because that's what they've done with ripping off Allbirds.
And it's funny because it's the opposite of what Shopify got so much pushback for on the shop app. Their entire business is built on hiding in the background and emphasizing their stores and the merchants. And when Shop brings their brand forward, it doesn't make sense, but Amazon could do this the other way.
There are probably some skeptics out there saying "Well, look at what Amazon did with their marketplace. They started to copy the trends and started releasing some products." But this gets them goodwill. Shopify is already doing that. They're not getting into the retail game. They're certainly doing it with the different software products on the marketplace. And so, what's fascinating about Amazon is that I don't think they care about amazon.com as a brand. If I'm buying these shoes, I think they're totally fine taking a cut. Someone else has put their heart and soul into designing them and all these other things, at being a partner, right?
For your business, it's really about that mission metric you're trying to achieve. That, and not getting ahead of yourself in terms of branding or partnerships, or these types of things. If a giant behemoth of a brand wants to offer you a white label partnership, take it. Because that's distribution, and maybe they don't know it's you. Yes, you're giving up a little revenue for that. But ultimately, that achieves distribution and gets people using it.
You want to find these places where you can use your leverage to make sure that you're pushing your product to the people you're trying to get to, so you can get more of that mission metric.
- Membership models push for more of a mission metric. You see it with Costco. You see it with Sam's Club. We've seen this time and time again, and Amazon is the champion of this at this point. Amazon has mastered this.
- Niche down when you have a fragmented market and focus on high-value segments. We talked about it at length, but Amazon's Prime bundle is broadly appropriate for everybody. There are some high-value segments in there that Amazon could double down on. We talked about Amazon Business, which they're already doing, but maybe a bundle for the time leading up to the wedding, perhaps the first year of the baby. There are high-value segments of customers that they could make a new kind of niche bundle around.
- Go up the value chain as an advantage. And in the case of Amazon, they're solving the single storefront problem. For most businesses, it's just thinking through that mission metric you’re trying to get to, or the mission metric you’re trying to optimize. What are the things that you can do, even if they're not in the core of your product, to push for that? And this is what ProfitWell's free metrics are for.
When we need this data to feed the algorithms that we have, we can exchange for the value and then provide very transparent value for the products that we're offering. So, it's a key thing to keep in mind. Ultimately, many brands need to ask themselves: What are some out-of-the-box actions I can do to push my mission metric forward?
Who's up next?
Next week, we have a nice little aspirational episode. We'll be talking about the man, the myth, the legend, or the infamous legend, depending on how you look at him. We're talking about Joe Rogan. What would a Joe Rogan podcast subscription look like?
I think he's technically in the dark web, but he's kind of on the border, depending on who you ask. But I think there's a lot we can learn from what he's doing well with his content base. We'll consider what someone like that can do, similar to other subscription podcasts and Patreon-type products on the market. He has some super fans. And I cannot wait to see that willingness to pay.
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This is a ProfitWell Recur production—the first media network dedicated entirely to the SaaS and subscription space.
By Patrick Campbell
Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.
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