Before Prime Day became a bigger shopping event than Cyber Monday, Amazon’s team was scratching its head a decade ago. The challenge thrown by Jeff Bezos was to increase customer loyalty to Amazon.
Two months after the problem-solving session in December 2004, Amazon unveiled Prime. Prime provided access to 2-day delivery for an unlimited number of orders, for $79 annually.
Prime has proved to be a consumer honeypot, growing from 0 to 10M from 2005-13 and 10x in just 5 years. Bezos is his fantastic shareholder letter this year revealed Prime had crossed 100M subscribers globally.
Prime has clearly become the arrowhead of Amazon’s consumer growth. While Prime did solve the customer loyalty increase, it also cleverly removed a massive growth obstacle.
That customer obstacle, which Amazon identified early on, was shipping fees.
In his excellent blog piece on Invisible Asymptotes, an early Amazon employee Eugene Wei identified this as Amazon’s growth ceiling. The rationale is quite clever – people hate paying for shipping, to the point of being irrational.
This irrationality is so strong, it makes customers avoid purchasing even discounted products. To solve for this problem, Amazon bundled shipping fees (partially) upfront.
That bundle is nothing but Prime.
It is no wonder that most consumers quote free shipping as the reason for purchasing Prime. The “free” shipping is recovered through the margin of products it sells, customer’s sensitivity to price reduces for Prime “fulfilled” products.
That brings us to the question of Prime Day, that we recently participated in as Indian (or global) consumers.
Why would Amazon give such steep deals on Amazon Prime Day and barely break even/lose money on their products?
This is because Prime Day’s strategy is not product-focused, but customer-focused.
It all boils down to the line “Deals exclusively for Prime members”. Prime Day is nothing but a potent customer acquisition strategy for high-quality (profitable) customers.
Prime members are found to spend twice as much as “normal” shoppers (ergo high-quality customers). This occurs due to yet another clever perception management strategy where Amazon has made delivery “free” by actually charging for Prime upfront.
As a customer, I am now “committed” to spend till I recover my Prime membership. People hate paying for delivery, so Amazon calls it Prime – and I spend more!
The total lifetime spend of a Prime member (lifetime value) is expected to far exceed the “Prime Day discount” (actually customer acquisition cost) during Prime Day. Amazon Prime customers spend roughly $600 a year and Amazon may make ~20% as margin ($120).
Thus, up to $120 of discount, Amazon would still be profitable on a customer basis. Users would sign up for far less. Prime Day is actually an incredibly profitable long-term strategy.
It is not a new strategy, though.
Alibaba has popularized Single’s Day shopping to such a large extent, 2017 crossed $25Bn in sales – 6x Amazon on Prime Day. Nevertheless, it is an important customer acquisition strategy – especially for the Indian market.
Amazon and most large internet companies are saturating in their domestic markets. As I had analyzed earlier, the acquisition of PillPack and Whole Foods expands the Prime wheelhouse to increase per customer spend in the US.
Further combating of saturation will happen by acquiring new users in India, where there are at least 300 million urban consumers. India’s demographic dividend ensures it is a market of the future, and Amazon is out to acquire them.
Prime Day saw 35% of its sign-ups from small towns, which shows you why there was a silent roll out of the small ticket size 129 INR subscription. With Walmart acquiring Flipkart, the fight for the Indian consumer only intensifies. Amazon is digging deeper to lock in the Indian consumer.
The hope is the Amazon India’s website also crashes someday, due to unprecedented demand.