Amazon is busy whipping up shoppers for its annual Prime Day sale, signing up celebrities including Taylor Swift, Lady Gaga and Kobe Bryant to promote the two-day discounting event that kicks off on Monday.
But beyond the revenue boost Amazon will get from customers eager to snap up cheap electronics, apparel and beauty products, the event’s greater value may be the people it recruits to Prime, the membership programme customers must join to access Prime Day discounts.
“The company is gearing everything to Prime,” said John Blackledge, equity analyst at Cowen. “Prime members buy more frequently than non-Prime members, they buy across more retail verticals and they just spend a lot more. And they generally don’t turn off their subscriptions.”
With Amazon’s revenue growth slowing — to a four-year low of 16.9 per cent in the first quarter — Prime is an important factor in improving the company’s margins and building out new businesses, including advertising, that will power future growth.
Prime members worth $190bn
Amazon discloses little information about the scale or financial impact of Prime, which has more than 100m global subscribers, but separate surveys by Cowen and RBC Capital estimate that between 63m and 75m US households, or 50 to 60 per cent, subscribe to Prime.
But US membership growth has cooled recently, raising pressure on Amazon to find ways to attract new members and increase the perceived value for existing subscribers for what is essentially a subscription to shop. The company said it would spend $800m this year to cut Prime shipping times to one day.
Prime Day is also a powerful hook: Cowen’s data shows subscriber growth accelerated in the second quarter of this year ahead of the event after remaining relatively flat last year.
In 2016, Cowen estimated that the net lifetime value of a Prime member was about $3,000, taking into account their average monthly spending and the costs to Amazon. That would put the total value of US subscribers at nearly $190bn today.
Prime helps draw in smaller sellers
But Prime is probably worth even more thanks to the new revenue streams the company has built around the subscription.
The programme has played a significant role in the growth of Amazon’s marketplace, where big brands and small businesses sell goods alongside those sold directly by Amazon.
Third-party merchants now account for 58 per cent of gross merchandise sales. This improves margins because Amazon takes a cut of sales and charges fees for fulfilment, payment and advertising services, but does not have to buy the inventory.
For an additional fee, sellers can join the fulfilment by Amazon programme, known as FBA, where Amazon handles storing their products in its warehouse and sending them out to customers — and making them eligible for Prime’s fast shipping promise. That has expanded the selection for Prime members beyond what Amazon could do on its own.
Sellers say they have little choice but to pay up to get the blue “Prime” label on their listings in order to show up high in search results. FBA is seen as offering the most economical way to ensure they can meet the programme’s shipping guarantee.
“To be successful on Amazon, an item has to be Prime,” said Deepak Mehrotra, co-founder of California Design Den, one of the top sellers of cotton bedding on Amazon.
Amazon can sell more services to sellers
Amazon allows some sellers to store and ship themselves and label their items as Prime, but Mr Mehrotra said the costs and logistics of using Amazon’s service are compelling.
He said FBA charges him $6 to $6.50 to send a set of sheets to a customer, versus $9 to $10 to ship it himself through UPS. “On a $40 sheet set, if the difference is $3 to $4 dollars, that’s 10 per cent,” he said.
On Prime Day, sellers can offer discounts exclusively to Prime members — but they must be part of FBA to do so. This year Amazon is waiving the fees it charges to offer limited-time “Lightning Deals” on Prime Day for some brands if they make more items eligible for discounts, according to consultants and sellers.
Amazon’s growing advertising business also benefits from Prime, thanks to the data the company has on members’ spending habits and the time they spend on its websites, apps and devices, where they can be served ads.
Track trends in tech, media and telecoms from around the world
“If we have a dollar to spend on advertising, it makes much more sense to put it on Amazon where there are already millions of eyeballs,” said Caron Proschan, founder of Simply Gum, a natural confectionery company.
There is a trade-off, she acknowledged, in letting Amazon control customer relationships and data, such as email addresses that the gum company could use for marketing. But she said it is worth it because of the volume of sales generated on the ecommerce site.
Advertising and fast shipping feeds impulse shopping
Prime members are especially attractive to big brands looking to reach affluent consumers who are already in the mood to shop. “They are heavier users and they can be monetised more heavily than non-Prime users,” Mr Blackledge said. “They are more likely to convert [to buyers].”
Mr Mehrotra said he has noticed in recent months a “considerable improvement in the revenue we get through ads” on the site. “One part could be our team is doing a good job, but I think a good portion has to be their systems are getting sophisticated at placing ads in the right place at the right time.”
Ms Proschan said the combination of powerful ad targeting and fast shipping offered by Prime has “eliminated a lot of the hurdles to online shopping” for an “impulse item” such as chewing gum.
“Traditionally there was this notion that people are used to buying it in the checkout aisle but it was not a staple that people would buy online,” she said. “But I think you can replicate that impulse experience online. You get served up that ad and it’s almost the same as being in that checkout line, and in many ways more targeted, because their algorithm knows more about you.”
She added: “And because of the free shipping Prime members get, people are more likely to buy.”
History of Prime
Prime debuted in the US in 2005 as an “all you can eat” two-day delivery service for $79 a year. Since then it has expanded to include access to streaming music and video, discounts at Whole Foods, the grocery chain Amazon bought in 2017, and a slew of other services, and has been rolled out in 17 countries. Amazon raised the annual price to $119 in the US last year.