Is Amazon a Subscription-Based Business?
30 Oct 2021Amazon Prime is justly celebrated as a key to the tech giant’s massive success, but commentary often omits the most basic thing about Prime - it’s a subscription through and through.
Amazon is not primarily viewed as a subscription-based business. Recent consideration of subscriptions as a form of commerce generally focus on digital products; for example, streaming media (Netflix, Spotify), news and information (WSJ, NYT), business software (office suites, communication tools) and cloud computing (AWS, Azure). While Amazon runs strong offerings in a number of digital areas (like, for instance, AWS), it is still primarily considered an ecommerce company. And much of Amazon’s ecommerce is now catalyzed by its incredibly succesful subscription offering, Amazon Prime.
The strategy and launch of Prime have been the subject of both articles and books, so we won’t rehash the details here. It was initially launched as a way to remove friction from the ordering process by offering free 2nd-day shipping in exchange for an annual ‘membership’ fee. The specifics of how the Prime initiative emerged and saw the light of day in 2004-5 have a lot to do with foundational work that the company did by building out its fulfillment centers, establishing its supply chain, and introducing software features such as one-click purchasing.
The problem that Prime sought to address was that in the mid-2000s, Amazon’s rate of growth had slowed. In the absence of more purely digital lines of business that were still nascent or had not yet seen the light of day, ecommerce growth was seen as essential to the future of the company. It’s easy now to forget what a pain point shipping was in the early days of the commercial internet. While Amazon had plenty of data suggesting that free shipping increased the quantity of goods that customers would order, Prime was launched without assurances that it was going to be profitable and some within the company thought it a bad idea. Reportedly, Amazon’s CFO was an internal opponent of free shipping.
For five or six years after its early 2005 launch, Prime was known as Amazon’s “free two-day shipping” service, but the company added features and Prime-adjacent programs such as Fulfillment by Amazon (2006) and Amazon Prime Video (2011) to increase the program’s value to customers. As it added benefits, Amazon also increased the price of Prime - $79 at launch $119 today. For many consumers, the value to them (of never having to think about shipping plus other ‘free’ perks) is almost incalculable. It took a while for Prime to become a wild success, but by the time of Jeff Bezos’ 2021 letter to shareholders (his last as CEO), the company reported 200 million Prime Customers worldwide.
Let’s look at Prime’s main benefits for Amazon:
- increased “stickiness” for its best customers: why would you order from some other site or go to a bricks and mortar store, if you already have free shipping from Amazon?
- revenue bump from memberships - close to 24 billion/year if each membership is priced at $119 per year.
- customer benefits boost other Amazon businesses - Kindle books, video rentals (paid channels), music upgrades, etc.
In brief, Prime is a case study for the benefits of subscription commerce. And, yes, Amazon is a subscription-based business.