July 11 is Prime Day, a shopping holiday Amazon (AMZN 0.45%) made up akin to Alibaba's (BABA +1.20%) Single's Day (11/11). Amazon started the holiday in 2015, and other retailers have since joined in to compete with the e-commerce giant for sales.
But Prime Day is about more than just driving more sales in a typically slow quarter for Amazon. There's a lot of strategy behind the big one-day sales event in the middle of summer. Here are three reasons Prime Day is absolutely genius.
Image source: Amazon.
It pulls forward new Prime subscribers
A lot of people trial Prime during the holiday shopping season as they do their last-minute gift buying. Prime Day can pull forward a lot of those trial members into the third quarter with its exclusive deals. Amazon can then more easily convert those trial members into paid members after the 30-day trial ends, or when they come back to shop at the end of the fourth quarter.
Prime Day offers yet another incentive to join Prime. And with the holiday expanding to China this year -- where Amazon launched Prime last fall -- Amazon is poised to take on Alibaba. Amazon isn't able to offer the same level of benefits for Prime in China as it does in the United States. Prime Video and Music aren't available because of censorship laws, and free shipping takes longer and is only available on orders over a certain threshold.
But providing exclusive deals should entice many Chinese to sign up for the new service. And Prime has a tendency to lock customers into Amazon as their preferred retailer. That could help it break into the Chinese e-commerce market in which it has thus far failed to make a significant dent.
Chinese consumers love shopping holidays. Alibaba's Single's Day generated $17.7 billion in transaction volume on Alibaba's websites last year. And JD.com sold $17.6 billion worth of stuff during its 6.18 shopping festival last month. If Amazon can achieve even a small fraction of that success in China, it will blow away its previous Prime Day record of an estimated $500 million in sales.
It incentivizes more merchants to join Fulfillment by Amazon
Amazon's FBA program allows merchants to send inventory to Amazon's warehouses, and thus allow Amazon to guarantee two-day shipping to Prime customers. Since Prime Day is all about Prime, it's imperative for many merchants to qualify their products for the program and take advantage of the influx of Prime shoppers on the marketplace.
Amazon's marketplace is becoming extremely crowded, making it difficult for some merchants to stand out. That's led some to experiment with using Wal-Mart's online marketplace. One way for them to stand out, though, is to make their products Prime eligible. It might cut into their margins, as Amazon takes a fee for storing and shipping inventory, but it could boost sales for third-party merchants.
A stress test
Last year, Prime Day was Amazon's biggest shopping day in its history. All indications are that Amazon will break the record once again with the inclusion of China and India this year.
That gives Amazon the opportunity to stress-test its distribution capabilities ahead of the holiday shopping season. In 2015, Amazon experienced higher fulfillment costs during the fourth quarter because of its inability to keep up with the stress placed on its infrastructure from both FBA merchants and its Prime members. Amazon responded in 2016 by building out 26 new distribution centers, mostly in the second half of the year, after its Prime Day sales blowout.
Prime Day allows Amazon to gauge second-half demand and ensure that its fulfillment centers have the capacity to meet that demand. It can then invest accordingly based on recent shopper data instead of relying on data and estimates from last year. That should make its capital spending more efficient.
Prime Day is about more than just increasing sales. It gives Amazon an opportunity to attract more shoppers to Prime -- which is a particularly large opportunity internationally -- making them more loyal Amazon customers. It also provides incentives for merchants to join its FBA program, and it gives Amazon a chance to stress-test its distribution capabilities before the important fourth quarter.
