Jun 8, 2017

'Prime is the gateway drug': Amazon's most puzzling move yet could be one of its most brilliant

Amazon's decision to go after lower-income customers with a discounted Prime membership has puzzled some industry experts, but it could turn out to be a brilliant strategy.


Critics say that shoppers on government assistance, whom Amazon is targeting with its new discount, are less active online and have limited access to broadband internet, smartphones, and credit cards.

The discount slashes the cost of Amazon's monthly Prime membership nearly in half, to $5.99 a month, for customers who have an electronic benefit transfer card, which is used for government assistance like the Supplemental Nutrition Assistance Program, better known as food stamps.

"These consumers have always indexed lower in online transactions, and their living circumstances are often not well-suited to package delivery, and many of these consumers don't have vehicles to drive to a location to pick up packages," Sucharita Mulpuru-Kodali, an internet consultant, told The Associated Press. "Of the long list of businesses that Amazon could target, this doesn't seem like the biggest one."

But Amazon doesn't necessarily need a huge swell of lower-income shoppers to join Prime for the effort to pay off. Even if Amazon were to get a tiny fraction of them hooked on Prime, which offers free two-day shipping on millions of items, it could pay off in the long run because Prime customers are highly loyal, according to Doug Stephens, a retail-industry consultant.

"Prime is the gateway drug for the heroin that is Amazon," Stephens told Business Insider. "If this can get new people into the Amazon ecosystem, it's very sticky."

Prime customers spend 2.7 times as much with Amazon as non-Prime members, according to Greg Melich, an analyst at the research firm Evercore. And the service has an astonishingly high renewal rate of roughly 96%, meaning most customers renew their memberships after paying for the service for two years.

Amazon has been highly effective in getting upper-income shoppers hooked on Prime.

The service claims about half of US households, including more than 70% of upper-income households — those earning more than $112,000 a year — as members, according to data from Piper Jaffray.

By comparison, a customer with a one-person household who qualifies for SNAP earns less than $15,444 a year.

But Amazon has nearly tapped out its penetration in upper-income markets, so it makes sense that it would be looking for other routes of growth.

About 20% of the US population receives government assistance, and most of those customers are more loyal to Amazon's retail rival, Walmart. Nearly $1 out of every $5 in SNAP benefits was spent at Walmart last year, according to Morningstar.

So Amazon's strategy of going after lower-income shoppers isn't meant only to tap into a new market, but to send a message to Walmart, which has been trying to lure Amazon's customers.

"Amazon is sending a message to Walmart saying, 'OK you want to try and chase our core customer? Then we can play that game, too,'" Stephens said.

Business Insider

by Hayley Peterson