In his 2015 letter to Amazon.com (AMZN 0.79%) shareholders, CEO Jeff Bezos wrote, "We want Prime to be such a good value, you'd be irresponsible not to be a member." That includes people who can't afford to pay $99 per year for all of Prime's benefits.
Amazon is now taking steps to make Prime more affordable for everyone, offering a significant discount for customers on government assistance programs. Those members will pay just $5.99 per month for access to two-day shipping, video streaming, and all the other standard Prime benefits. Amazon's starting with programs that issue EBT cards, as they're relatively easy to verify.
The goal is to make Amazon's online marketplace a more attractive option for lower-income shoppers -- a demographic dominated by Wal-Mart (WMT +0.46%) and other brick-and-mortar retailers.
Image source: Amazon.com.
Only the latest effort to attract lower-income shoppers
Households with income of less than $50,000 are the fastest-growing group of Amazon's 80 million-plus Prime customers, according to research from R.W. Baird. But there are several hurdles to attracting low-income households for Amazon versus many brick-and-mortar retailers.
There's, of course, the price of Prime. Last year, Amazon made it more easily digestible for customers who can't afford to pay the $99 annual fee all at once by offering a monthly payment option. Customers can cancel their membership anytime, so they can use their Prime benefits selectively if need be. The recent move to lower the price for customers on government assistance is merely an extension of that policy.
Another obstacle is that a larger portion of lower-income households are underbanked. Some don't have credit or debit cards, which can make online shopping nearly impossible. Amazon recently introduced Amazon Cash, which allows customers to load funds to their Amazon account at various brick-and-mortar partners like drug stores and gas stations. Additionally, Amazon will soon let all grocery customers use their EBT cards for payment.
Smartphones are largely solving the problem of below-average internet access among lower-income households, and Amazon already has one of the best apps and mobile websites in the e-commerce space.
Competing with Wal-Mart on pricing
Amazon has historically been aggressive with its pricing, particularly when smaller competitors start to gain traction in the market. This year, Amazon turned its focus to consumer packaged goods, using software that tracks prices across its competitors' stores like Wal-Mart and automatically lowering its prices below the competition. Amazon even offers lower unit pricing than wholesale warehouse competitors like Wal-Mart's Sam's Club.
Amazon's efforts have forced Wal-Mart to fight back, using its heft as the biggest retailer in the world to push down supplier pricing. But while Amazon is willing to lose money on these items -- at least for a relatively short period of time -- Wal-Mart doesn't seem as willing to take that risk.
Amazon can afford the losses if it can manage to attract more Prime members, as it's aiming for with its recent lower price for lower-income households policy. It could also lead to the start of many new lifetime relationships with price-conscious consumers, resulting in more high-margin purchases down the road.
Finding more room for growth
The theme of Bezos' 2016 letter to shareholders was that it will always be "Day 1" at Amazon. That is, Amazon is always looking for new avenues of growth and fending off "Day 2" -- i.e. "stasis, followed by irrelevance." His primary tactic for fending off Day 2 is obsessing over customers.
The policies recently put in place to attract low-income households are all focused on making it easier for the customer to shop on Amazon.com. They also help expand Amazon's customer base, providing more room for outsized revenue growth for the foreseeable future. Even if Amazon's efforts fall flat, there's little risk involved with lots of upside.
