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Amazon Prime – A smart strategy

I spend some thoughts on Amazon Prime this morning, after this headline caught my attention “Amazon to continue heavy investment in Prime despite losses”. What is the objective and purpose of Prime? What is the strategic motivation to invest in a service labeled as a “loss maker”?

From my view Amazon Prime creates value on different fronts for Amazon:

  1. Customer lock-in effect: A customer pays $99/year to get free 48h express shipping for all orders. Why should a customer buy offline or order from another shop if he enjoys express shipping by default from Amazon as a Prime subscriber. Ok, offline shopping is not a perfect substitute for online shopping, but the instant character of express shipping is an important factor in the competition with high street shops. 
  2. Business model transformation: From a one-time transaction model to a subscription based model. Amazon is transforming it’s business model into a subscription based-model – razor/razorblade model. The razor (Prime) sells on a loss, while the razorblades (Products) are sold on a – hopeful – healthy margin. Amazon decouples the physical product sell from the shipping service. This could be further extended in the future, e.g. Prime subscribers are also getting preferred customer service treatment with a dedicated hotline or special return handling.
  3. Lever for Amazon Marketplace: Prime has different effects on the Marketplace business. A) Prime encourages 3rd party Merchants to go for Fulfillment by Amazon, as Merchants benefit from the free express shipping that Prime subscribers get B) Even if Amazon itself is not the cheapest seller, customers with Amazon Prime are incentivized to order from Amazon directly, as they get the free express shipping.
  4. Amazon Prime should also help to improve Amazon’s cash flow. Subscription based-models typically also help to create more stable cash-flows and have a better predictability. 

Adding digital goods (ebooks, movies, music, photos storage) as value add to Amazon Prime, which have zero respectively low marginal cost (Ok, licensing), is another smart move and helps to drive the Amazon hardware business with the Kindle and Fire TV.

There are probably a couple of other advantages for Amazon. (e.g. driving customer satisfaction). Prime is definitely more than a simple loss-making up-sell/cross-sell.