Why the Amazon Prime Price Increase is Good for Retailers
Weighing the revenue generated by subscriptions against the cost of shipping, Amazon.com has clearly lost money on Prime. And let's be honest: Prime isn't about the Kindle lending library or the on-demand videos; it's about the fast, "free" delivery. So it's no surprise that Amazon's recent announcement of a price increase for Prime was welcomed by investors, who foresee improved margins in the coming years.
Retailers should treat the announcement as good news too. Why? Because it clearly shows that Amazon believes consumers value fast delivery enough to pay more for it. Consumers’ expectations of what they pay for delivery should start to shift from the "giveaway" model. There's another reason why the Prime price increase is good for retailers, and it's not so obvious. To understand it, we need to dig deeper into how Amazon has avoided raising the price of Prime until now, and consider what it will do with Prime next.
Amazon has been willing to take a loss on Prime because it thought of logistics strategically as a sales and marketing investment. Contrast that with the approach of traditional retailers, who have always viewed logistics tactically, as an operating expense and "after the sale" activity. In order to minimize its costs, Amazon has quietly shifted much of its two- and next-day parcel shipments to the cost-effective local delivery (courier) industry.
While retailers such as Office Depot continue to use couriers in select markets to complement their fleet and the big parcel carriers, Amazon is the only retailer with a national local delivery network. For eight years, Amazon has avoided a Prime price increase, proof that the local delivery industry is a viable alternative for retailers to UPS and FedEx.
So where will Amazon go next with Prime? Using Costco's different membership levels as a guide, the next logical step would be for Amazon to offer different levels of Prime at various prices. Instead of today's approach of giving customers the "kitchen sink," Prime would feature a range of services, including music streaming, mobile apps, online storage and same-day delivery in expanded markets. Digging into the options on the delivery side, Amazon will likely offer same-day delivery as a part of a new Prime level in an a.m./p.m. service-order in the morning, get it by the evening and vice versa.
Although Amazon will set consumer expectation, the good news is that an expectation of same-day delivery evens the playing field for retailers. The proximity of stores to consumers puts retailers in a position to offer premium same-day services, such as eBay Now's 90-minute delivery or Google Shopping Express’ scheduled delivery. Even with a premium-priced offering, Amazon would be hard-pressed to offer these delivery service levels without a significant investment, leaving retailers with a competitive differentiator for which increasing numbers of customers expect to pay more.
What lessons can retailers learn from Amazon's decision to raise the price of Prime? Take action! Since the last time Amazon made a big splash like this, the launch of Prime in 2005, the company has increased its sales 10 times over. In the decade since, the company's innovations have continued to expand its share of the e-commerce market. For retailers, the critical lesson is to act now, because failure to act could mean Amazon is taking your business.
Rob Howard is the founder and CEO of Grand Junction, a provider of same-day delivery technology.
