So what is Amazon Prime, and why are all these Americans dropping USD$119 a year for the privileges that the membership brings?
On the surface of it, Amazon Prime is a simple loyalty program. It started in 2005 as a membership service with the hook of free two-day shipping within the “contiguous United States” on all eligible Amazon purchases. A couple of years later, Amazon rolled out Prime to Germany, Japan and the UK, and as of today, it’s available in 17 countries, including Australia, which launched in 2018 (it’s not in New Zealand yet, but we’ll get to that).
Over time, Amazon has weaponised Prime with different rates and bundles of offers depending on the market to make it as attractive as possible to enter the Amazon ecosystem. On top of express shipping, in the States, you get Prime Video, Prime Music , Prime Gaming, Amazon Photos, Prime Reading, Prime Magazines, discounts at Whole Foods Market (that’s a whole ‘nother story) and more. In India, where Amazon is battling it out with Walmart’s Flipkart, Prime can be purchased for as little as AUD$2.40 a month and of course you get exclusive Bollywood content as part of the deal.
But the extras are simply frills around the edges. The real attraction of Prime is free shipping, which has moved from a two-day to one-day service in major markets in the U.S. in the last year. And from experience living there from 2014-2019, once you have invested in a membership, you tend to default to Amazon for just about any item that you don’t need immediately. That’s why Amazon is the number one site for product searches in the States, way ahead of Google. All those searches translate into a ton of taps and clicks to buy, about 47 per cent of all US e-commerce is Amazon.
The impact at street level is immense. In New York City, where I lived, 1.5 million packages are delivered every day, so it’s a fair guess to say roughly 750,000 of those are Amazon’s. Think of that – three quarters of a million Amazon deliveries in just one city every single day. My street was regularly clogged with delivery trucks and the lobby of the apartment building stacked with Amazon boxes.
Amazon is constantly striving to further speed up the time from click to collect. In late 2014, Amazon launched Prime Now in Manhattan – free two-hour delivery on 25,000 items. I trialled the service and placed an order at my office, only to have it arrive 23 minutes later. Prime Now has been made available in many other cities across the States in recent years.
As I wrote in a Forbes article in 2018, “Prime became the central flywheel which drove the (Amazon) business”. Amazon CEO Jeff Bezos put it this way: “If you look at Prime Members, they buy more on Amazon than non-Prime members…once they’ve paid their annual fee, they’re looking around to see how can I get more value out of the program? So, they look across more categories, they shop more…a lot of their behaviours change…it really is a flywheel.”
That flywheel generates big bucks. In the US, Prime members shell out US$1,400 on Amazon annually, compared to non-Prime purchasers who spend about US$600 per year.
Amazon’s aggressive approach in Australia
In the US, Prime is part of the culture, part of their way of life. It’s not that way in our little corner of the world as yet, but I believe that it will be. Amazon is being razor sharp with their pricing to make Prime super-attractive in Australia – it’s AUD$59 for annual membership, which is not much more than a third of what it costs in the US.
That aggressive approach is starting to pay off. Earlier this year, it was reported that Amazon Australia’s largest increases in revenue for 2019 came courtesy of Prime. The subscription service rocketed from AUD$4.3 million to $35.4 million – up by an astounding 723 per cent.
Note: In New Zealand it’s a somewhat different story of course. Prime Video was introduced to Kiwis in late 2016 as part of a global rollout, but Prime membership is not in place, as there is still not a local version of the website in place, and you can’t ship product from Australia. The New Zealand government has also hit the brakes on Amazon US by adding GST to purchases under $1,000 from overseas sites. Anecdotally, that creates sticker shock which takes the shine off Amazon’s available range. Still, Prime Video has started to expose the sub-brand of Prime to the local market.
Some pundits may point out that it’s different in Australia. It’s a multi-marketplace country and New Zealand is dominated by Trade Me, with big box retailer The Warehouse Group gearing up its e-comm game and recently launching The Market, its own online marketplace.
While it’s true that Amazon’s foray into Oz was initially muted, and commentators quickly claimed that it “failed”, Amazon has caught up rapidly. Nielsen data for July shows that while eBay still leads in marketplaces in Australia, Amazon continues to close the gap and the respective apps are actually now head-to-head.
Also, Amazon has always played the long game, willing to absorb losses for an extended period in search of growth. It is no different in Australia. Amazon lost AUD$4.7 million in 2019 while it doubled sales to AUD$292 million. The loss is a rounding error for the global behemoth and unlikely to trouble the accountants in Seattle.
So, Amazon will continue to grow in Oz, and Prime will be the key tactic (and at some stage, Prime Video will become Prime Membership in New Zealand). Once Amazon reaches a critical mass of members in Australia, the flywheel will take over. And the next drive for Prime members is just around the corner on Prime Day, which will likely be October 5. The Black-Friday-style event is really a huge membership drive (which also happens to be a massive sales drive). To get access to the sale, you have to be a Prime member. And guess what? There happens to be a 30-day trial available!
Post Prime Day, Amazon will generate even more business and interest through Black Friday, Cyber Monday and Christmas.Globally, financial website The Motley Fool states that Amazon will add 50 million Prime devotees just this year. You can bet a reasonable number of those will be Aussies. I predict that within 12 months, the Prime effect will be a major force on Australian retail – with New Zealand to follow at some stage down the road. And, for better or worse, we will all eventually be living the Prime life.
Jon Bird is CEO at VMLY&R Australia & New Zealand.