As Amazon’s (AMZN, Financial) retail operations keep expanding regionwise as well as on a revenue basis, the company has been relentlessly adding to its Amazon Prime services. Amazon’s focus on its membership service is unparalleled in the retail industry. Costco (COST, Financial) is the only company that has an extremely successful membership model while Walmart's (WMT, Financial) Sam’s Club is left to play second fiddle in the retail loyalty segment.
Amazon’s Prime program goes beyond offering discounts and deals as the company tries to pack as much value as it can into the membership program that started off as a free two-day shipping benefit.
“In 2005, Amazon announced the creation of Amazon Prime, a membership offering free two-day shipping within the contiguous U.S. on all eligible purchases for a flat annual fee of $79 (equivalent to $97 in 2016) [10] as well as discounted one-day shipping rates.” – Wikipedia
Now, aside from the original deal, Amazon Prime members get access to Amazon Prime Video, music streaming, thousands of books, unlimited photo storage, free restaurant delivery, early access to Amazon retail deals, voice shopping with Amazon Echo’s Alexa and much more.
Source: Amazon
But the problem is services such as Amazon Prime Video and Prime Music are cost-intensive, and it will take many years to reach the size and scale from which those services can be consistently profitable for the company. Amazon does not give details about the costs involved or the revenues it makes from Prime services, but it is clear that Amazon is subsidizing most of the additional costs that it incurs for running these services using money from other parts of the business.
Amazon’s objective seems to constantly increase the value of its Prime service, making it an invaluable asset for its users. Once it finds deep value in Prime, these customers are then highly incentivized to order on Amazon, thus increasing the volume of goods sold by the company.
For any retail company, the higher the volume of products moved, the higher its chances of profitable operations. Scale will obviously provide retail companies a better negotiating platform for procurement; in Amazon's case it can also bring more sellers to the table.
More products at cheaper prices and more sellers means more customers, and more Prime members means more sales volume. It is a self-perpetuating cycle that runs at the cost of the competition, which gives the likes of Walmart even more reason to step up its online and smaller format store game.
By initiating this self-feeding cycle, Amazon has set into motion an industry-changing juggernaut. We will have to wait for its current quarter results, but there is no doubt that the success of Prime will somehow have translated itself into revenue growth.
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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