Prime Time

25 10 2011

Sam Walton may take the lion’s share of the credit for revolutionizing retail, but I think that Amazon’s Jeff Bezos may very well be the most understated pioneer in business history. In 16 short years he has built from scratch a company that is quietly rewriting the playbook.

And while its 3Q sales for 2011 (between $10 and 11 billion) is a mere drop in the retail bucket compared to Walmart’s greater than $400 billion annually, it always has the attention of the folks in Bentonville. If anything, Amazon’s e-commerce machine is the envy of every WM executive who would love to figure out how to replicate it.

While Amazon is often recognized for capturing the book market and then systematically adding product categories, as well as gobbling up competitors like Diapers.com and Zappos.com, perhaps the biggest feather in its cap is its success with Amazon Prime.

According to industry estimates, about 5 millions out of 121 million Amazon customers have ponied up $79 for an annual subscription, which at face value provides unlimited “free” two-day delivery of each and every purchase. No minimums. Nearly every product category included. Ship to anywhere.

Sounds good in principle. Toss in the free streaming movies that Amazon now gives to all Prime customers, and you start to suspect this is a major profit center in its own right. Why else would Amazon give away something for which Netflix suddenly realized it had to charge 60% more?

Oh yeah…and let’s not forget the trial periods Amazon gives to Moms-to-be and students. It’s all intended to suck people in to the river.

Of course, one could argue that Amazon Prime helps lock customers in to one source for their merchandise, and this alone is a solid retort. But I think this river runs much deeper. Unless you are a very frequent customer (say, ten times per year or more), most people are not getting their money’s worth on the subscription.

And let’s not forget that Amazon has brokered enormous shipping discounts with its couriers. That box of books that might cost you $8 to send may only cost Amazon a fraction of that. The price of shipping goes down significantly when UPS can fill truckloads at a time.

So this sword is indeed double-edged, but in a good way. Amazon uses Prime to maintain loyalty, and then hopes you forget to use it very often. Why, it’s almost like selling a piece of merchandise for $79, but not having to deliver $79 worth of goods.

Now you know why Amazon can afford to give away the streaming movies. And why Netflix is wondering how to recoup the 800,000 customers it has lost since July.

That Amazon gives away Prime to Moms-to-be and students is yet more evidence of Jeff Bezos’ genius. Amazon may only be 1/10th the size of Walmart in sales, but it is a much leaner, meaner fighting machine. With an unblemished track record of store closings (it’s still batting zero for zero, thank you very much), there’s just not a lot of overhead to worry about.

Which is every reason why Walmart should be.

Dr “Click Here” Gerlich


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