Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Amazon Prime Improves Its Customer Retention Rate

By Daniel B. Kline - Jun 1, 2016 at 11:28AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Research shows the company holds onto users at rates that rival Costco, long-considered the gold standard for keeping paying members.

Once Amazon ( AMZN -1.38% ) gets someone to sign up for its Prime service, even for a free trial, the company does an impressive job of holding onto that member.

After the 30-day free trial expires, new research from Consumer Intelligence Research Partners (CIRP), shows that 73% become paid members. After that first paid year expires, 91% of Prime members renew for a second year while 96% of those subscribers pay for a third year, according to CIRP. Those numbers have been improving steadily since the quarter ended in September 2015 and have risen above where they were when the company raised the yearly charge for the service from $79 to $99 in 2014.

"With Amazon Prime, Amazon confronts two or possibly three critical moments in retaining members," said CIRP Founder Josh Lowitz in a press release. "It needs to persuade 30-day free trials to pay $99 for a full-year membership, and then persuade first-year paid members to renew for a second year. It also needs to persuade second-year members to continue a membership, ideally to continue year after year."

Basically, Amazon is operating its premium service in the same way rival Costco ( COST 0.65% ) sells memberships to its warehouse clubs. Instead of selling month-to-month memberships, which allow people to jump in and out, like most streaming services do, Amazon and Costco customers have to make a big decision once a year. [Prime did recently start offering a monthly option, which sells for $10.99 per month, though that became an option after the CIRP survey.]

Focusing on a yearly membership is a pretty big risk, but it has clearly paid off for Costco and for Prime, which offers members free two-day shipping, a video streaming service, and a bunch of other perks. The boost for Amazon is that Prime members spend more on Amazon.com than those who aren't members.

Free shipping is one of the major draws for Amazon Prime and the company uses a mix of robots and people to offer two-day service. Image source: Amazon.

How does Amazon compare?

According to CIRP, which based its finding on a survey of 2,108 U.S. shoppers, Amazon retains 91% of its paid members for a second year. That compares very strongly to Costco, which reported a 90.4% renewal rate during its Q3 2016 earnings call in late May. The warehouse club has seen its retention rate tick down slightly due to changing its credit card provider.

Costco does not generally offer free trials, so it's fair to compare retention rates once a consumer actually makes the decision to join Prime. Essentially, if the CIRP numbers are accurate, Amazon and Costco are roughly tied when it comes to holding onto customers. That's even more impressive for the online retailer when you consider that its annual membership costs $99 while the warehouse club only charges $55.

To put these numbers into context, if you take the roughly 9% annual membership loss Amazon and Costco experience, it works out to about 0.75% churn each month. That's dramatically better than the four major United States wireless carriers, which all have churn numbers over 2% each month, according to Statista.

It's also comparable to the 9% annual churn for Netflix ( NFLX -2.33% ), which tops all streaming services, and much better than the 50% rate for Hulu, according to research from Parks Associates.  Aside from Netflix, streaming services tend to have a more volatile churn rate because most make it very easy for consumers to join, cancel, and then join again. That's a pattern people are likely to follow as they join a service for specific content and then quit once they have consumed it.

Amazon Prime is clearly a big draw

These numbers put Amazon on equal footing with Costco, which has generally been considered the gold standard for member retention. The results, which CIRP based on its quarterly surveys of U.S. Amazon shoppers, show that Amazon offers a very compelling product, but the most impressive thing may be the growth in retention between year two and three.

"Once Amazon Prime members renew for a second year, Amazon appears to have attracted them for the long haul" said Lowitz. "After a second year, renewal rates are over 95%, and have improved gradually in the past two years."

That's very good news for investors because it costs money to attract new members (whether that be through free trials or marketing costs) but retaining them is free. Holding onto Prime members gives the company a stable customer base that has steadily grown.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$3,389.79 (-1.38%) $-47.57
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$602.13 (-2.33%) $-14.34
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$528.93 (0.65%) $3.42

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
640%
 
S&P 500 Returns
139%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/04/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.