- Amazon Prime Now, the service that Amazon uses to deliver customer orders in one or two hours, is enjoying strong adoption.
- Prime Now has strong potential to encourage more people to sign up for Amazon Prime, Amazon's chief growth driver.
- The new service could prove to be pivotal in accelerating growth for the online giant.
Amazon (NASDAQ:AMZN) introduced Prime Now, a service that allows Amazon Prime members to place orders for select items at $7.99 for one-hour delivery and for free for 2-hour delivery timeframes, in December 2014. Amazon has dedicated Prime Now fulfillment centers as well as full-time employees for the program in a few select markets.
Now it appears as if the experiment is working out great. A study by Cowen on 1,250 Amazon Prime subscribers in the U.S. has found ‘‘extremely impressive early penetration’’ by the service. The survey found that 25% of respondents used the service in January, with 24% of these using the service on a weekly basis and 70% multiple times a month, a sign of high engagement rates. That’s quite impressive for a service that has only been around for a year and is available in just 24 markets in the U.S.
Prime Now could, therefore, turn out to be one of the more innovative products that Amazon has introduced that could really spur more people to sign up to Amazon Prime. Amazon has been using a carrot and stick technique to get more people to sign up to Amazon Prime. The company recently hiked the minimum order required to qualify for free shipping from $35 to $49(the stick). This arrangement encourages more people to sign up for a Prime membership since they only have to put up another $50 to qualify for extra perks such as free 2-day shipping and unlimited video streaming. People who fail to join Prime will of course have to pay for orders that would previously have been shipped for free.
Prime Now is the carrot part of the equation that encourages people to join Prime by promising super-fast delivery times and free shipping. To qualify for Prime Now a shopper has to be an Amazon Prime subscriber. Many retailers, including brick-and-mortar types such as Walmart (NYSE:WMT), and Target (NYSE:TGT) are now trying to implement same-day deliveries to encourage people to place more orders. By using Prime Now, Amazon has raised the bar by promising one-hour and two-hour delivery timeframes. Free shipping and instant delivery can be powerful magnets for consumers, and Amazon wants to stay ahead of the pack.
Amazon Prime Driving Growth
There is a good reason why Amazon is so intent on growing Prime subs. Although Amazon tends to keep a tight lid on the number of Amazon Prime subscribers, Consumer Intelligence Research Partners, an organization that tracks consumer behavior across multiple channels and devices, estimates that Amazon finished 2015 with 54M Prime subscriptions, 35% higher than in the previous year. The organization says that 47% of all Amazon shoppers in the U.S. are Prime members.
Amazon Prime shoppers tend to buy a lot more from the online giant than regular shoppers by almost a 2:1 ratio. Indeed, CIRP estimates that the average Prime shopper purchased Amazon goods worth $1,100 vs. $600 for non-Prime shoppers in 2015. Looking at Amazon’s 2015 revenue growth figures, it becomes readily apparent that most of the company’s growth is currently coming from new Prime subscriptions. Amazon finished 2015 with top line growth of 20%, which implies that not less than 80% of that growth came from the lucrative Prime segment. Amazon still has plenty of room to run since it can potentially double the number of Prime accounts before it can fully cover the U.S. market.
Maybe in future, the company can figure a way to introduce the service in international markets. Amazon has more than 300M customer accounts with more than 70% of those located in international markets. Only 37% of Amazon’s sales currently come from foreign markets though.
Overall the popularity of Prime Now could prove to be hugely beneficial for Amazon since it’s likely to encourage more Prime subscriptions and ultimately drive higher growth for Amazon. Amazon has one of the best logistical capabilities to implement same-day deliveries without a huge increase in costs for the company. This should continue giving the company an edge over rivals Wal-Mart, Target, Alibaba (NYSE:BABA), and other retailers with a strong online presence.