American Consequences - August 2017

with Amazon Prime. Again, it’s the focus on the long term that allowed Amazon to make billions from a daring move. Amazon Prime is a loyalty program that gives customers free two-day shipping and other perks for a $99 annual fee. Here’s the problem... It only takes about 10 orders a year for the shipping program to cost more to Amazon than the Prime fee. Doesn’t seem like a great business... “We made this decision even though every single financial analysis said we were completely crazy to give two-day shipping for free,” former Amazon Vice President Diego Piacentini told author Brad Stone for his book on Amazon, The Everything Store . On the surface, Prime is just that... a money loser. Amazon has around 65 million Prime members. That’s half of all U.S. households . And, as predicted, the shipping consistently costs more than the $99 fee. That means hundreds of millions in “losses.” Still, Amazon chased this project and aggressively marketed it to build up the number of customers on board. It had its eye on the long term and it paid off. The average Prime customer spends double what

the typical Amazon customer does: $1,200 a year versus $600 a year, according to the firm Consumer Intelligence Research Partners. As if Amazon wasn’t dominant enough already, hooking people up with free shipping makes buyers Amazon addicts. Many Prime members check Amazon first for nearly everything they buy. Prime also includes Amazon’s streaming-video service. It’s a Netflix competitor, but it has three times as many movies and has started producing award-winning original material. Herein lies the real genius to Amazon’s plan. “We get to monetize [our subscription video] in a very unusual way,” Bezos said in a speech last year. “When we win a Golden Globe, it helps us sell more shoes.” Netflix and Wal-Mart can’t do that and never will... The only way for Amazon to have built Prime (or Amazon Video or AWS or the Kindle ecosystem) is to take a long-term view. These products took millions to build and had no clear path to earning that money back at their start. They weren’t unreasonable ideas. Many startups today burn through cash with the intention of figuring out a business model later. Amazon doesn’t do that. These products all have paying customers from the start. It’s just that the ideas often don’t branch out naturally from Amazon’s offerings or make profits on Day One. Of course, not every bright idea grows up to be a big hit. The company has suffered

"We get to monetize [our subscription video] in a very unusual way. When we win a Golden Globe, it helps us sell more shoes."

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