Amazon (AMZN -2.56%) just completed another successful Prime Day event (it actually lasts two days now), with more than 250 million items sold to Prime members worldwide on June 21-22. "Members shopped more and saved than any other Prime Day," the company said in a statement. 

This year's event came a bit early (it's usually in July) and it will help the bottom line for the second quarter.

Prime Day rivals the biggest shopping days of the year, including Cyber Monday. It's so big that shoppers expect other retail companies to offer deals on Prime Day too. While the event helps lift sales across the e-commerce landscape, Amazon knows exactly what it's doing to grow its business and use Prime Day to expand its competitive moat.

Amazon Prime logo.

Image source: Amazon.

Prime Day gets more customers locked in

Amazon first introduced Prime Day in 2015. That year, Prime memberships grew 51%, reaching "tens of millions of members worldwide," as CEO Jeff Bezos stated in his 2015 shareholder letter. 

Since then, Prime memberships have grown rapidly, from an estimated 54 million in 2015 to more than 200 million. Every year, some of the best-selling items on Prime Day are Amazon devices, specifically Fire TV sticks and Alexa voice-assistant products. Amazon lures in new Prime members with compelling deals, and many Prime members buy an Amazon device that keeps them locked into the Amazon flywheel.

Customers have connected more than 100 million smart-home devices to Amazon's Alexa, which puts the wide selection of Amazon's inventory just a spoken word away -- a massive competitive advantage.

However, there's much more to this event than growing Prime memberships and driving a temporary bump in sales.

Prime Day boosts Amazon's profits

What Prime Day is really about is driving more sales volume with third-party sellers. These sellers drove 55% of Amazon's unit sales in the first quarter, up from 52% in Q1 2020. This has a big impact on Amazon's profitability, since the fees Amazon charges on third-party transactions carry a higher profit margin than items sold directly by Amazon. 

As part of this year's event, Amazon ran a promotion in which customers who spent at least $10 on select small-business products between June 7 and June 20 received $10 in credit to spend on Prime Day. This led to sales more than doubling with small-business sellers compared to Prime Day 2020 (which was delayed until October because of the pandemic). Sellers are happy to get the extra business and exposure for their brand, and it's good for Amazon's bottom line.

In 2020, higher unit sales, including sales from third-party sellers, and advertising contributed to a 75% increase in retail operating profit, excluding Amazon Web Services. 

Segment 2020 2019
North America $8.6 billion $7.0 billion
International $0.7 billion ($1.7) billion
Amazon Web Services $13.5 billion $9.2 billion
Total operating income $22.9 billion $14.5 billion

Data source: Amazon 10-K filing.

There's nothing that attracts more shoppers than the allure of great deals. Customers sign up for Prime to get access to exclusive deals, which attracts more third-party sellers to Amazon, expanding the inventory selection. A growing selection casts a wider net that brings in more customers and begins to create a virtuous cycle. That's more profit for Amazon to build more fulfillment centers and a bigger Prime delivery fleet, and offer more free benefits to its new Prime members, which just adds momentum to the cycle.

This is why Amazon Prime Day continues to get bigger every year, and why Amazon should continue to win for investors in the booming e-commerce market.