Amazon’s annual report shed some light on the numbers behind Prime, its members-only loyalty program:
• Prime is a cash cow that helps Amazon offset cost-centers such as shipping. Amazon generated $6.4 billion from Prime and other subscription fees in 2016, an increase of 43% over 2015. For comparison, Costco generated $2.6 billion last year from subscription fees. Amazon uses some of the revenue it generates from Prime to offset shipping costs.
• Prime puts a moat between Amazon and other retailers. Morgan Stanley estimates that 90% of Amazon’s total subscription revenue came from the $99 /year Prime membership tier; Amazon also offers a $15 /month ($180 /year) tier for its grocery delivery service Prime Fresh. By that estimate, we can assume there were 58-65 million Prime members in 2016. Prime members are more loyal to Amazon than non-Prime customers because the subscription fee incentivizes them to do a greater share of their shopping with Amazon and less from other retailers.
Amazon’s increasing dominance is creating new opportunities for upstarts but challenges for some legacy brands. For example, Amazon’s Dash buttons and Subscribe & Save programs remove friction in the checkout process and condition consumers to purchase their pre-selected default brands.
In L2’s recent Amazon IQ report analyzing the Personal Care vertical, we look at why Amazon’s e-commerce models are so disruptive in particular categories. In addition, we highlight the brands that are successfully engaging in Amazon’s seller programs, and what legacy brands should be doing to maintain market share in their respective category.
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