- The growing relevance of better omnichannel experience for customers has forced retailers to enhance their online presence.
- It has also made customers bargain hunters as price comparisons are now fingertips away.
- Subsequently, this has made price a serious competitive advantage. As of Q4 2015, Amazon Prime has developed into a valuable asset that will enable Amazon to efficiently compete on price and to increase customer lifetime value.
Over the last decade, online shopping has grown stronger and more relevant. The infrastructure to support this rampant growth in eCommerce is getting better. Because customers see eCommerce as the number one place of choice when shopping, companies are adapting to this new trend and competing with notable giants like Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA). The emergence of eCommerce means retailers will not have to endure the cost of brick and mortar. It also means companies can have minimal human labor costs handling more customers.
But eCommerce also threatens any prospects of margin expansions. Meaning strategies like Walmart's price matching initiatives force retailers to re-think their pricing strategies online as price comparisons are now just fingertips away. But this is more advantageous to well-funded and bigger retailers who can operate closer to their marginal costs in an effort to knock-out competition. This is why Amazon's global presence and Tmall Global of Alibaba are poised to dominate the market because they can survive on low margins and they are better positioned to leverage economies of scale and turnover to enhance margins.
The threat of margin contractions is made stronger because of the emergence of bargain hunters. Customers are more likely to be drawn to cheaper and to discounted products.
This is why Amazon Prime is a great competitive advantage for Amazon. As more retailers establish their strong online presence and as Google Shopping's popularity increases, competitive pricing will be a huge factor in attracting customers. Amazon Prime can be Amazon's path to sustainable and stable revenue growth. For instance, in Q4 2015, worldwide paid Prime members increased 51% year-over-year.
Even though paid Prime members only grew by 47% in the U.S., almost half of the U.S. households now have prime. This high penetration rate and huge customer base creates a strong Amazon ecosystem of customers who consider Amazon as the first place of choice when they want to buy something. This ecosystem is made more lucrative by Amazon because people generally want to get great deals. If you are a frequent shopper, Prime shipping does not only get things to you faster, but it also makes the aggregate prices on Amazon really cheap relative to other sites.
In addition, I think consumer mindset is shifting. Consumers want the cheapest products but at the best possible quality and the fastest shipping option available. Simply put, consumers want to pay discounts for premium services. Amazon Prime has really transformed from a mere passport in getting free two-day shipping of orders on Amazon to so much more. The membership now includes access to free same-day delivery in eligible zip codes, Prime Video, Prime Music, Prime Photos, Prime Pantry, Prime Early Access, Kindle First among others.
These extra features increase customer retention. The extra usage of Prime Video, Prime Music or Prime Pantry for example, helps drive new customer adoption through higher trial conversation rates and retention of preexisting customers. Subsequently, these features will help Amazon because they contribute to higher renewal rates for subscribers. In other ways, Amazon has figured a way to keep customers entertained and loyal. A strategy that will help with customer retention over time.
Moving forward, even eCommerce will be in dire need of consolidation. There are a lot of services that people have to pay for separately. If you aggregate all these costs, Prime suddenly becomes a fair price. Separately, some Prime services do not stand out against their competitors, but as a whole they are cost effective and much more valuable than the money you end-up paying. For instance, Amazon Prime Video is not as good as Netflix.
Netflix has better movie selections than Amazon Prime. But because Prime comes with a lot more added features, Prime is like getting a good chunk of Netflix's benefits for free. But as Amazon Video increases its own content and expands on its movie offerings, the competition with Netflix will get tougher and the value of Prime will be extremely high considering the price you pay for it.
Lastly, a research done by Frederick Reichheld of Bain & Company in a Harvard Business Review article, "The Value of Keeping the Right Customers," showed that increasing customer retention rates by 5% increases profit by 25% to 95%. Prime members are the most valuable asset Amazon is developing. This explains why Prime's incentive structure to retain customers is a powerful competitive advantage.
- The lifetime value for prime customers is going to skyrocket as their contribution to profit over time is going to be high. As Amazon goes beyond delivering merchandise on its platform to delivering things like groceries, the contribution profit of prime members will dramatically rise over time.
- Amazon Prime tends to boost customer spending on the platform.
- Prime tends to cause shoppers to stop shopping anywhere else because it makes Amazon prices very competitive and attractive to Prime members.
- There is a need for consolidation and Amazon is offering that.
- Amazon is in a price war focused on market dominance and a path to sustainable revenue streams through the Prime memberships.
In the end, you have to meet customers where they are most comfortable and not where you are most comfortable. Amazon Prime allows the company to have a first mover advantage in consolidating different features that are currently and will continue to shape consumers tastes moving forward.