Amazon (AMZN, Financial) recently introduced another major perk for Prime members by making a collection of books, short stories and magazines free to them in the form of Prime Reading. The major retailer has been adding more and more layers to the prime membership program, making it clear that it views the membership model as a more sustainable way to stay in the retail business.
The new free books service may not be something that is going to drive users in droves into prime membership, but the real question one needs to ask is: what is the motive behind Amazon adding new services and perks at such a high frequency. There are several reasons why it is indeed a great tactic by Amazon to improve its operational efficiency.
As most of us know, the retail business is inherently a low margin one, and for an e-commerce company like Amazon the margins can get even tighter due to high shipping costs. One of the best ways to reduce these costs and improve margins is by increasing the amount of merchandise that you sell. To put it simply, the higher the sales, better the odds of you improving your margins.
Amazon Prime membership base
But how big is Amazon Prime, and why is it so critical to the success of Amazon’s retail business? According to Morgan Stanley research, Prime members spend about five times as much as non-Prime customers.
This level of spending is what makes Amazon Prime so valuable to the company. The estimated 63 million members, therefore, account for the bulk of Amazon’s retail revenues. And that’s understandable because when you pay $99 for an annual membership, you’re naturally going to take advantage of their free two-day shipping as often as you can. From Amazon’s perspective, the company not only makes the $99 per member, but also benefits from several orders during the course of the year.
The 63 million Prime members is, of course, merely an estimate because Amazon holds those cards close to its chest. This is one of the closest estimates from Consumer Intelligence Research Partners, as reported by Forbes.
Amazon’s new monthly offer
Initially, Amazon only offered the membership for an annual $99 fee, but earlier this year the company shifted gears and started offering monthly memberships as well, for $10.99. For anyone who doesn’t want to shell out the $99 for a year, this option allows them to just sign up as and when they need it. For example, someone can sign up just for three months over the holiday season and still get all the benefits an annual member does.
This flexibility is presumably meant to attract such seasonal customers who don’t want to be tied into an annual contract. By reducing the price point for entry while not denying them the entire range of free services on Prime, Amazon is offering an even better proposition to non-members shopping at Amazon.com.
The biggest consideration here is the big-box retailers. If Amazon Prime memberships continue to grow rapidly, it may severely erode their respective markets. Wal-Mart (WMT, Financial) could well be the only large retailer preparing itself for the onslaught by entering into the e-commerce segment with the Jet.com acquisition and a possible investment in India’s second largest e-tailer Flipkart.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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