The Amazon Prime Business Model & How It Works
Whichever time zone you were in during today’s small hours, since the clock struck midnight, you’ve gained access to more deals than Black Friday – well, if you’re an Amazon Prime member, anyway. Amazon’s Prime business model gives members so much for seemingly so little in return. But how can they afford this? And how have they come to such a luxurious position as to offer more deals on their site – in addition to free two-day shipping – than Black Friday? Let’s go through how Amazon Prime works as a model and how it could work for your business.
How subscription e-commerce came about for Amazon
Amazon has always offered competitive pricing and an easy returns policy. But while they may have been popular with shoppers for their low prices and perks, they haven’t always enjoyed large profit margins. To combat this challenge, in 2005 Amazon’s strategy team invented their annual subscription service, Amazon Prime, which offered free two-day shipping to all members at a rate of $79.
How Amazon Prime works
Once a customer places their first Amazon Prime order, they’re locked in for a full year’s subscription contract. What are you going to do as a shopper? Keep buying from Amazon until the year is out. In fact, according to Business Insider, Prime members spend around double to quadruple of what non-Prime members spend. This service has now become one of Amazon’s most valuable assets.
Why Amazon Prime works for customers
Three words: Convenience. Benefits. Elitism. A subscription-based, e-commerce model guarantees you non-refundable annual revenue in exchange for customer perks. Let’s go through each one and work out how you can use subscriptions to your advantage (even when you’re not a commerce juggernaut like Amazon!):
Free delivery makes Amazon super convenient. Whatever you want to buy on impulse, you can do it with a little less guilt knowing you’re not paying for delivery. According to Wharton, Shoppers spend 30% more per order when free shipping is included. And if it’s next day delivery – you’ll get 24% more orders – people who forget birthdays, holiday gifts and anniversaries will suddenly become your best, most loyal friends!
Amazon Prime members get a huge range of benefits: from unlimited access to movies and music to free photo storage and even next day delivery from non-Amazon related stores. Consider how you can work with other businesses to offer mutual benefits. It might be that you do an exchange: say you’re a wine store – you could offer free wine glasses from another store each time a customer buys four bottles of wine. In exchange you could give the wine glass store a bottle of wine each time their customers buy four glasses. The trade price of your products means you’re not losing out on much, but free items and benefits mean more revenue.
Today is Prime Day – which means if you’re a member you can get access to more discounts than Black Friday. And if you’re not, you won’t get the discounts. Simple as that. It’s that classic case of seeing a line for a restaurant go around the corner – you pay attention because it looks exclusive – you want to get in! An offline activity you could do if you’re a less global store is to offer membership events. Taking the wine store example again, you could arrange a wine tasting session for your subscription members. Perhaps you could offer free gift vouchers to high spending subscribers. Or if you’re a global business (or maybe you just have a lower budget), your own take on a Prime Day sale could increase your sales by a quarter – using prices with the number 9, e.g. $5.99 can boost sales by 24%.
Why Amazon Prime works for business
Three more words: Predictability. Margins. Retention. Customers return goods left, right and center and there’s competition around every corner. So it can be hard to predict revenues, increase margins and retain clients. If this sounds like your business, a subscription business model could be music to your Board’s ears.
Customers can return an item for a fault, because the item doesn’t look like its image or just because they plain don’t want it anymore. It’s impossible to predict how many of which items will be returned, and this can have a huge effect on your revenue forecast. If your revenue is guaranteed via subscription on the other hand, doesn’t this allow for a more accurate forecast?
On average, Amazon Prime members spend $1500 per year compared to $625 spent by non-Prime members. If they’ve paid for all those benefits, they may as well use them, right?
Amazon Prime has over 92% retention rate: once Amazon users buy into Prime, they tend to stick with it. Imagine how far you could forecast your revenue with that figure!
Macquarie Securities estimates that by 2020, half of US households will subscribe to Amazon Prime. Bearing in mind that their revenue will increase by 1.5% for every 1 million Amazon Prime members, that’s not a bad forecast! Thanks to the Amazon guinea pig, we can see that subscription e-commerce is on the rise. There are still very few commerce businesses that have taken a leaf from Amazon’s books – why wait to try out the Amazon business model? After all, it’s in its Prime.