Why Amazon Prime May Be the Future of On-Demand Living

Amazon fed investors a smorgasbord of impressive performance statistics in its quarterly earnings announcement April 25 – such as a 43-percent increase in year-over-year revenues and the generation of $1.4 billion in operating income for Q1 2018.

But by the tine Amazon announced its Q1 earnings, the company had already disclosed an even more intriguing statistic via CEO Jeff Bezos’s April 18 letter to shareowners: 100 million. That’s the number of Amazon Prime members, a figure Amazon had never before shared. Amazon Prime is bigger than Costco. Amazon Amazon Prime also represents the future of Amazon and possibly the on-demand economy

Prime Is Amazon’s Future

For a fee (which is increasing to $119 annually), Amazon Prime members enjoy a number of advantages unavailable to non-Prime customers, such as free two-day delivery on orders and access to exclusive entertainment content via Prime Video.

With Amazon Prime, Amazon is redefining convenience as a premium service by creating an on-demand lifestyle. Just as Starbucks convinced people to pay more for fast coffee, Amazon wants us to pay more to get access to an even more exclusive tier of on-demand services.

For people willing to pay a fee to become Prime members, Amazon will unlock a world in which you can get anything you want, from music to fresh kale, whether you are at home or on the go. This bundling of services around a customer willing to pay for premium services is crucial to Amazon’s future for good reason: Amazon Prime customers spend about $1,300 a year, nearly twice the amount that non-Prime customers pay. And Prime customers’ purchasing volume is increasing (from 22.7 purchases annually in 2015 to 24 annual purchases in 2018) while purchasing volume for Amazon non-Prime customers is decreasing (from 14.2 times annually in 2015 to 13.2 times annually today). Amazon is rewarding those who buy more often and spend more.

Amazon is betting that if the company cross-sells products and services on demand, Prime customers will spend more money inside Amazon. As Jeff Bezos said at a Vox Code conference in 2016,

When we win a Golden Globe, it helps us sell more shoes. And it does that in a very direct way. Because if you look at Prime members, they buy more on Amazon than non-Prime members, and one of the reasons they do that is once they pay their annual fee, they’re looking around to see, ‘How can I get more value out of the program?’ And so they look across more categories — they shop more. A lot of their behaviors change in ways that are very attractive to us as a business. And the customers utilize more of our services.

Those services, spanning categories ranging from fashion to financial services, fall into three categories: utilities, personalized services, entertainment.

A Super Utility

Utilities encompass services and products designed to make it easier for us to purchase goods and either pick them up or have them delivered. Recent examples include:

  • Premium delivery. You don’t have to be a Prime member to get fast delivery of products you order on Amazon.com, but Prime members certainly get more convenient forms of delivery. For example, Amazon recently announced Amazon Key and Amazon Key In-Car Delivery, through which Amazon drops off packages inside homes and cars of Prime customers. In participating markets, Amazon literally gets access to Prime customers’ cars and homes to safely deliver packages, which has obvious benefit to anyone who is away from their home too often to accept packages physically. Amazon Key is one piece in an end-to-end, self-contained service that Amazon is building for Prime members whether they want to order fresh groceries, clothing, or books. For instance, through its ownership of Whole Foods, Amazon offers Amazon Prime Now, which provides free two-hour grocery delivery to Prime customers. Amazon now commands the largest share of the online grocery market, but the company faces strong competition from Walmart with its large network of stores and purchasing power.

  • At-home replenishment. Amazon complements its delivery services with Dash buttons, which are WiFi-enabled hardware devices that Prime customers can affix to any object in their homes. With Dash buttons, Prime customers can restock products such as diapers and detergent with a simple press of a button. Ideally, people affix Dash buttons in places where they notice staple supplies running low. For example, if you have a Dash button on your wash machine, you can easily restock on detergent when you notice you are running low. According to Amazon, the Dash buttons have exploded in popularity, causing a spike in demand from brands wanting to sign up as Dash button partners. The list of brands signing up for the program include Campbell’s Soup, Cascade, Clif Bar, Mentos, and Quilted Northern, to name but a few. All told, hundreds of branded Dash buttons exist.

  • On-the-go. By building or buying brick-and-mortar stores, Amazon offers premium services for Prime members who want to pick up products on the go. For instance, Amazon is expanding its Amazon Go grocery stores, where Prime members who can take grocery products off the shelf and sail out the door without standing in any check-out lines. And through its Amazon Books (physical stores Amazon has been opening since 2015) and Whole Foods grocery stores, Amazon can offer Prime members special services such as lower prices for books and exclusive promotions for Prime members who shop at Whole Foods. And Amazon is just getting warmed up. As Jeff Bezos wrote in his letter to shareowners, “We’ve also begun the technical work needed to recognize Prime members at the point of sale and look forward to offering more Prime benefits to Whole Foods shoppers once that work is completed.” According to CNBC, those benefits will include 10-percent discounts on already-discounted products. (CNBC noted that 75 percent of Whole Foods shoppers are Amazon Prime members, while less than 20 percent of Prime members are Whole Foods shoppers.)

Personalized Services

In addition to providing utilities, look to Amazon to provide more personalized services to Prime members. An example is Prime Wardrobe, “a new service that brings the fitting room directly to the homes of Prime members so they can try on the latest styles before they buy.” With Prime Wardobe, Prime members can try before they buy – making Prime Wardrobe a direct threat to services such as Trunk Club.

Another example is Prime Book Box, a subscription service for children’s hardback books, curated by Amazon editors. The service was announced May 1. Customers will review Book Boxes before they are shipped and swap books from a curated list to tailor each shipment, similar to how Prime Wardrobe works.

Amazon will likely launch more lifestyle services that position Amazon as a curator and advisor, especially as Amazon develops more private-label brands.

An Entertainment Hub

Entertainment services reside namely with music and movies.

  • Amazon Studios. Amazon offers original Amazon Studios content — typically prestige titles that appeal to niche audiences — as one of the incentives of joining Prime, and the strategy has succeeded in building Amazon Prime memberships. But Jeff Bezos aspires for Amazon Studios to become more than a provider of prestige titles for a narrowly defined audience. He wants to draw more Prime members by offering blockbusters. So, in November, Amazon beat HBO and Netflix to secure the rights to a TV adaption of  The Lord of the Rings. Amazon will create a multi-season franchise including prequel content that opens the door to introduce new characters and dramatic plotlines. The rights reportedly cost $250 million – but creating the series could cost as much as $1 billion, which represents a costly gamble.

  • Amazon Music. Amazon’s strategy is to offer two tiers of music streaming services: Prime Music, which offers a limited selection of songs to Prime members; and Music Unlimited, which provides more songs for a monthly fee. Here again, Prime members get something extra. Amazon’s strategy appears to be helping Amazon catch up to the two clear leaders of music streaming, Spotify and Apple Music.

Entertainment is an area where Amazon is more of a follower. But the company is catching up quickly and has the cash to make deeper investments, as the adaptation of Lord of the Rings shows. For more insight into Amazon’s entertainment aspirations, check out my blog post, “Amazon: One Industry to Rule Them All?

Alexa and the Echo

The linchpin for many of Amazon’s Prime-oriented services consists of Alexa, Amazon’s voice assistant, and the Echo smart speaker. Alexa is the heart of a rapidly evolving network that relies on voice commands to order what we want everywhere. Home base consists of the Alexa-powered Echo smart speaker, which reside principally in our homes. Since launching Echo in 2014, Amazon has sold an estimated 20 million Echo units and owns more than 70 percent of the market for smart speakers. In addition, Alexa and Echo are helping Amazon building a super platform that combines the convenience of voice with the ubiquity of Echo devices just for Prime members. For instance, Alexa offers services only to Prime members, such as voice shopping, exclusive deals, and streaming music.

As I have noted, Alexa is the key to Amazon influencing the uptake of voice as a lifestyle tool. Already we’re seeing Alexa become a premium service, too.

A Strategy Pays Off

The recent price increase for Prime membership demonstrates that the Prime strategy is costing Amazon. As Amazon told investors on a conference call, the increased cost of offering so many services to Prime customers is the reason why Amazon needs to charge more. But the fact Amazon exceeds 100 million paid Prime members globally demonstrates that the Prime strategy is also paying off. As Bezos gushed in his letter to shareowners:

13 years post-launch, we have exceeded 100 million paid Prime members globally. In 2017 Amazon shipped more than five billion items with Prime worldwide, and more new members joined Prime than in any previous year – both worldwide and in the U.S. Members in the U.S. now receive unlimited free two-day shipping on over 100 million different items . . . Prime Now is available in more than 50 cities worldwide across nine countries. Prime Day 2017 was our biggest global shopping event ever (until surpassed by Cyber Monday), with more new Prime members joining Prime than any other day in our history.

In his letter, Bezos wrote about the “divinely discontent” customer. He wrote, “Their expectations are never static – they go up. It’s human nature. We didn’t ascend from our hunter-gatherer days by being satisfied. People have a voracious appetite for a better way, and yesterday’s ‘wow’ quickly becomes today’s ‘ordinary’.”

With Amazon Prime, Amazon aspires to provide a better way. How much better can Prime become?

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