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OT: Why Amazon Prime Could Soon Cost You Next to Nothing

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Showing 1-25 of 27 posts in this discussion
Initial post: Mar 13, 2013 7:01:23 AM PDT
Last edited by the author on Mar 13, 2013 7:01:39 AM PDT
Kin-foot says:

Over the past few years, the arithmetic behind Amazon Prime has become one of online shopping's most familiar math problems: Do I buy enough from Amazon to justify paying $79 per year for unlimited two-day shipping?

But this calculus could soon change. Amazon makes so much money off Prime customers, according to a new report, that the company could drop the fee by dozens of dollars and still come out ahead.

As heavily as it promotes Prime, which also comes with free Netflix-style streaming video and access to the Kindle lending library, Amazon is equally circumspect about how well the program performs. In the heated debate over whether a company with profits as meager as Amazon's deserves such a high-flying stock, that information gap leads partisans both pro and con to play Prime as a wildcard in support of their claims.

Bullish analysts at Morningstar teamed with Consumer Intelligence Research Partners (CIRP) to dig into what is known about Amazon to come up with some reasonable estimates of the numbers behind Prime. The results are startling.

Amazon started its fiscal 2012 with a little fewer than 7 million Prime members and ended with nearly 10 million, largely thanks to the free Prime promotion that comes with the purchase of the company's bestselling Kindle Fire. That increase alone represents a huge coup for Amazon, an awesome display of locking in customer loyalty. As the report points out, those millions of people spending $79 each are all incurring a major "switching cost" - in other words, since they've shelled out so much to enjoy special privileges for shopping at Amazon, they're less likely to shop elsewhere.

The growth in 2012 memberships yields an average of 7.6 million Prime members over the course of the year. In all, Amazon had about 182 million customers for the year, the report estimates. By those figures, Prime members made up about 4 percent of Amazon's total customer base.

At the same time, CIRP's market research found those Prime members annually spent more than twice as much on average ($1,224) than non-Prime customers ($505). Adding in the $79 membership fee, Prime members bring nearly $800 more in sales per customer to Amazon. After subtracting all the additional costs of doing business with Prime customers - mainly greater expenses for sales, shipping and video streaming - Morningstar analyst R.J. Hottovy found that Prime members accounted for $78 more in profit before interest and taxes per customer than non-Prime customers. That's almost exactly the cost of a Prime membership.

To put that figure in context: Amazon's average operating income last year per each of its 182 million total customers came to less than $10. In other words, every Prime member is about eight times as valuable to Amazon as a non-Prime member. Put yet another way: More than one-third of Amazon's profits before interest and taxes came from fewer than four percent of the people who buy stuff on Amazon.

"They have hit on a means of creating some very, very valuable customers," says Michael Levin, a partner at CIRP.

What's more, the report says the value of those Prime members will only increase as the efficiencies built up by Amazon through its heavy spending on distribution centers and technological infrastructure start to take hold. By 2017, the report predicts Prime will have 25 million members. As Amazon's costs fall and customer loyalty is locked in, the report's authors anticipate Prime customers will spend even more as they start thinking of Amazon not just as the place to buy higher-ticket items like electronics but their main destination for everyday goods.

"They're starting to encroach on the territory of general merchants and grocery stores," says Morningstar analyst R.J. Hottovy. "I think that's the next frontier."

If it's true that Prime threatens not just Best Buy and Barnes & Noble but also Target, Kroger and Wal-Mart, the logic of lowering Prime's price makes even more sense. The more Prime members, the more purchases made on Amazon. The trick for Amazon is finding the sweet spot between how much a Prime membership increases spending versus how much cutting the price of Prime eats into the increased profit margin. Yet even by last year's estimated figure of $78 in extra profits from Prime members, Amazon could cut the price by $50 and still make far more than what the company makes off non-Prime customers.

Already, Amazon offers Prime to college students at a discounted rate of $39 per year. That discount does double-duty by catching customers just as they're developing their adult consumer loyalties while at the same time getting them so used to Prime that they'll miss it if they give it up after graduation. It's possible Morningstar's numbers are off and Amazon is losing money on student Prime members. But such a discount also gives Amazon a chance to beta-test consumer behavior when Prime is offered for less than half its regular price. If they see increased rates of sign-ups and spending, and Morningstar's numbers are anywhere close, Amazon is just as likely to be figuring out a way to push Prime's price point down.

If Prime members are anywhere near as valuable a catch as the Morningstar report's figures make them out to be, Amazon should be trying to make that price as low as possible. Or as CIRP's Levin says: "They should be able to give Prime away for free."

Posted on Mar 13, 2013 7:05:07 AM PDT
StriderNeo15 says:
Cool, give me a deal Amazon.

Posted on Mar 13, 2013 7:07:39 AM PDT
That is true. Ever since I got my prime membership I am just buying things I would normally go to the store for. The two day shipping is worth it alone since most of the items I buy I do not need right away.

Posted on Mar 13, 2013 7:07:47 AM PDT
JJ4prez says:
Yeah, I can see everyone getting free prime. It would definitely make people shop on Amazon more, thus increasing the overall sales.

In reply to an earlier post on Mar 13, 2013 7:17:33 AM PDT
Ice King says:
Same for me. I almost never go to the store to buy things anymore. And even when I want to buy something from another website I check to see if Amazon sells it first so I can get "free" shipping.

Posted on Mar 13, 2013 7:46:38 AM PDT
LemonLime says:
After I kept getting the "You've spent over $80 in shipping already this year, sign up for Prime" notification, I did and never looked back. The free shipping gets me everytime now. I've already used my $78 for the year already in 2013 so its definitely worth it. Not to mention $3.99/item one day shipping. You can't find a better deal. If you do please let me know. I use Amazon to send Birthday presents to friends in other states, my fiancee in Korea, and just for anything that catches my eye that I want. All for free shipping simply amazing.

Posted on Mar 13, 2013 7:57:47 AM PDT
Lucanus says:
Prime basically gives free 2 day shipping and access to free streaming for many TV/movies? I just signed up for a trial.

Posted on Mar 13, 2013 8:02:21 AM PDT
Last edited by the author on Mar 13, 2013 8:02:54 AM PDT
Him says:
I've had Prime for 4 years and haven't regretted it once. I once ordered and entire front porch full of vinyl railings, spindles, and parts that weighed well over 100lbs...Prime had it on my doorstep in 35 hours and I didn't pay a penny. Normal shipping was $99 for that product.

And I've really gotten into watching the Prime Instant Videos on my 360 and PS3.

Posted on Mar 13, 2013 8:09:12 AM PDT
CyberPhobia says:
This is kind of tricky. Right now with the price of Prime, people who get it are taking advantage of the shipping and spending more. If they drop the price, the more casual spenders may decide its worth to pick up, but not necessarily increase the spending habits. I'm sure Amazon would see an increase in sales from some people due to this, but saying Prime members spend X amount now, so dropping Prime membership costs to get more users will still get us X amount, might be silly thinking.

Posted on Mar 13, 2013 8:24:05 AM PDT
Him says:
I don't spend more because of Prime...I just buy from Amazon more instead of buying elsewhere. I get things that I'm already going to buy somewhere, but Prime gets it to me in 2 days or less for free, so I buy it from Amazon.

Posted on Mar 13, 2013 8:58:13 AM PDT
YIGT says:
Well i just got amazon prime for student never knew about this. My wife will be pumped getting free books for the kindle fire.

Posted on Mar 13, 2013 9:02:56 AM PDT
Voice of god says:
This article isn't so much "Prime could soon cost you next to nothing" so much as "We think Prime should cost you next to nothing."

Posted on Mar 13, 2013 9:06:03 AM PDT
It's definitely worth $39 a year for me. I am not sure about $80 yet though.

Posted on Mar 13, 2013 9:07:35 AM PDT
Chris94 says:
I would be truly pissed, since I just bought prime a month ago.

In reply to an earlier post on Mar 13, 2013 9:11:21 AM PDT
WesCyde says:
I am for this, even though $79 is well worth it for me for the amount of shopping I do on here. But will always take money back in my pocket for the same service so if they drop it to 50 or 60 awesome

In reply to an earlier post on Mar 13, 2013 9:11:26 AM PDT
J. Pardee says:
Hopefully this is true. I'd love to have Prime but it's not worth the full $80 for me.

In reply to an earlier post on Mar 13, 2013 9:12:48 AM PDT
YIGT says:
thats why i did the student one. I dont order enough stuff to warrent 80 bucks but I would for the 39 dollars and the video watching would be nice but we already have netflix so i might have to see if this is better.

In reply to an earlier post on Mar 13, 2013 9:17:24 AM PDT
Anthony says:
you only get the 2 day shipping with the trial version.

Posted on Mar 13, 2013 9:21:14 AM PDT
Soulshine says:
Prime would be nice, but I'm still ok with the free supersaver shipping on orders $25 or more. It's easy for me to meet that dollar threshold every time. If they ever dropped THAT then I'd reconsider.

In reply to an earlier post on Mar 13, 2013 9:36:30 AM PDT
Lucanus says:
I imagine I will be going forward and subscribing, it sounds worth it.

In reply to an earlier post on Mar 13, 2013 10:00:36 AM PDT
YIGT says:
The page says that you get 2 day shipping with prime not just the trial.

In reply to an earlier post on Mar 13, 2013 10:13:52 AM PDT
Anthony says:
you read my post completely wrong. the only benefit you get with the trial version is the 2 day shipping. why would they remove a benefit on the paid version?

Posted on Mar 13, 2013 10:14:22 AM PDT
Lucanus says:
I find searching which of their videos is free for Prime Members to be meh. Am I doing something wrong or is the interface just that crappy?

In reply to an earlier post on Mar 13, 2013 10:18:51 AM PDT
Last edited by the author on Mar 13, 2013 10:19:34 AM PDT
Ice King says:
In the upper left corner of Amazon's website there's a drop down menu with "Unlimited Free Videos" on the top. Those are the Prime videos.

Or if you you're using a Roku or some other device, the Amazon app usually separates them some other way. But I've always seen them separated.

If you mean you want to search for specific titles, just enter it into the search bar and when it comes up it will have a price with "free with Prime" or something beneath it.

In reply to an earlier post on Mar 13, 2013 10:21:35 AM PDT
YIGT says:
i chalk that up to no lunch yet sorry bout that.
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Discussion in:  Video Games forum
Participants:  17
Total posts:  27
Initial post:  Mar 13, 2013
Latest post:  Mar 13, 2013

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