A Prime Example of Smart or Stupid?

For an interesting face-off on Amazon's new Prime service, check out the Wall Street Journal today. (The Journal is offering this article free for the day.) For those who missed the news last week, Amazon announced a new club-like service that provides "free" two-day shipping on unlimited orders for $79 a year. While one columnist gives the service a tentative nod—"Amazon is bidding to lock itself in as its loyalists' default choice ... a state of affairs very different than today, and that would translate into an awfully healthy effect on the bottom line"—the other is much more skeptical. ("The online-retailing king is starting to look jittery, like a wide receiver catching a pass over the middle.")

In a way, it's a strange fit. Club-like programs are often for commodity-like companies where customers aren't inclined to be loyal, such as airline frequent flier programs or grocery store point programs. And yet, Amazon is built on a model customer experience that shouldn't need a loyalty program. But as other online retailers begin catching up with Amazon's customer experience, is this a sign of increasing pressure? What do you think of Amazon's move?

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  • Dave

    I am not a big Amazon fan... I generally find better deals elsewhere and I find their site increasingly cluttered and difficult to negotiate.

    Given that they are rarely the low-price retailer online (aggregate of item price plus shipping), I question the judgement of frequent Amazon buyers in general. I think there is an AOL-effect in play at Amazon where those not so sure of their net footing take comfort and are unconcerned that they pay more. As the proportion of the population who are more net savvy grows, I think Amazon is going to face increasing pressure.

    For those who feel some emotional bond with Amazon and order very frequently, this is an economically viable offer. If they broaden their universe of potential shopping sites, it becomes less so.


  • Sjoint-Keymaster

    My question would be Is such loyalty program designed to increase a regular buyer's purchases, or just to keep them loyal to Amazon? But i can also bet on the fact that 12 months from now, Amazon will figure out a way to offer this service to their best customers for free.

  • gg

    I think the fact of knowing that I can get "free" two day shipping after a one time payment will definetely help. I make half my purchases offline, only to avoid the steep delivery charges on 1 and 2-day shopping. Of course the $79 fee means that this makes sense only to people who spend, say at least $300 a year on books. These ppl would probably make back $40 by the way of lower prices on Amazon. Most of the time, this savings is nullified by the shipping cost.

    Also, I'm familiar with HBR case mentioned above, but I'm not sure that it applies here. The objective is to remind people they've paid for something, and hence prompt them to use it, which in turn would ensure the benefit from it, and hence re-subscribe. Probably monthly mailers by Amazon will suffice as a reminder, instead of a monthly payment.

    The only thing about monthly payments, they would work to the advantage of customers:
    I just build up a wish-list, sign up for a month (at say, $10?) and get free shipping on that order. Obviously, this will not make financial sense for Amazon.

    I think, cycnism aside, this is a great offer - meant only for a small segment of Amazon's customers - the big, regular buyers. Its a win-win for them and for Amazon. The rest of us are free to ignore it...

  • Maryann Devine

    Amazon would do well to look into research on clubs and subscription services, as in HBR's Pricing and the Psychology of Consumption by John Gourville and Dilip Soman. The perception of a great deal up front begins to wane after a few weeks, when money spent is no longer a recent memory. Remember that health club membership you bought at the beginning of the year? Their research shows that people who pay monthly for membership are the most frequent gym-goers, and therefore most likely to renew membership. That's where the loyalty is.

  • Derrick

    I like it, just from the standpoint that Amazon probably doesn't know how big a success or failure it will be. The only way to find out is to try it. It's clearly not a program for everyone, but for some it's definitely a good deal. If you don't like, don't do it. If you do, do it.

  • Dave Lewis

    Loyalty may be part of the reason behind Amazon Prime, but it isn't the main reason.

    I read this morning that online purchases were only 5% of total retail sales, and they will grow to 10% by decade's end. So Amazon and others are still a small fraction of the market today with a huge growth opportunity.

    The two biggest hurdles to making an online purchase are (1) the lack of a physical item to hold and view before buying, and (2) the delayed gratification of the purchase. Amazon's "Search Inside!" feature with books helps on the former. Amazon Prime addresses the latter by getting the products in our hands quicker (remember that overnight delivery with Prime is only $4 which is $12.50 less than normal).

    Their Free Super Saver Shipping was tested and modified over several months before it settled on the $25 threshhold. No doubt Prime will see adjustments, too, but I've got to believe it's another wise retail innovation from Mr. Bezos and Company.

  • Joe

    It's dangerous to read too much into the moves a company makes. All companies are concerned about customer loyalty and should take steps to improve loyalty. It shouldn't imply the company has become increasingly nervous when such steps are taken.

    That being said, $80 is a lot of shipping, but I have coworkers who spend more shipping than that from Amazon each year. This would be a good program for them.

  • LP

    It doesn't sound like Prime has been all that well worked out. And while it might incline some to spend more at Amazon, delivery charges aren't uppermost in my mind when impulse buying.

    I wouldn't say it's a sign of hard times - in fact, quite the opposite. Speaking as a junior minion, this sounds exactly like some manager's Bright Idea That Wouldn't Die and it's slipped through into reality, leaving a trail of sobbing, crushed people who tried to stop it in its tracks.

    This is therefore a sign of prosperity, as if Amazon have enough spare managers to come up with stuff like this...

    Beware of random acts of management. You never know what they could unleash on the world.

  • -e

    I carry an Amazon rewards Visa card - much more effective - pay me to be loyal, don't ask me for a loyalty oath in the form of paying to join a stupid club. I would agree with the sentiment that it makes Amazon look like they are falling on hard times.

  • Frank Steele

    I expect we'll see Amazon Prime moph into a more traditional customer loyalty program.

    This first announcement is about establishing the value of the service in consumers' minds, and about making some money from people who buy constantly from Amazon. Six months out, or maybe a year, I bet Amazon figures out a way to offer this service to their best customers for free.

    It would be really fascinating to browse their data warehouse: Would their most profitable customers be folks buying lots of media (books/DVDs/CDs) or companies buying computers, or alphageeks buying gadgets?

    I bet it's one of these, and they all want fast delivery - media buyers want the latest stuff, companies just-in-time it when employees come on board, and alphageeks need to be one gadget ahead of the nerd in accounting.

    In any case, I would look for them to launch some sort of a points program, with a threshold that triggers free shipping upgrades, within a year.

  • Andrew Hume

    I thought the exact same thing when I read about Amazon's loyalty scheme. It doesn't quite fit for some reason.

    Is a loyalty scheme like that designed to increase a regular buyer's purchases, or just to keep them loyal to Amazon?

    Unlike for example, an Airline loyalty scheme, customers may be tempted to buy just to get the most out of their free delivery deal. Maybe they will end up spending more at Amazon in that year?