Amazon.com (NASDAQ:AMZN) has invested hundreds of millions of dollars in its Instant Video service and the just-launched Music service in order to maintain and grow its Prime membership base. That's important because Prime members spend nearly twice as much as customers who are not members.
Prime subscribers spend almost $538 a year versus the $320 per year spent by non-subscribers, according to a study conducted by RBC. The survey, conducted in June 2014, was based on the answers of just over 2,000 Amazon.com shoppers -- 708 Prime members and 1,357 non-Prime customers. The chart below shows that those who spend less than $50 per 90 days with the online retailer are less likely to join Prime. Once the expenditure over that time period goes over $50, more consumers see the value in paying for a subscription.
This makes sense -- the key selling point of Prime is free two-day shipping on millions of items. The more a customer orders the better value their Prime membership is.
Amazon does not generally release exactly how many Prime members it has, but in January, the company acknowledged the number was over 20 million.
What is Prime?
Prime is Amazon's fairly ingenious way to lock people into buying from the online retailer. Subscribers pay $99 per year (an increase from $79 a few months ago) for free shipping plus access to the video and music. When Prime was launched in 2005, Amazon was still primarily an online bookstore. In those days, the online retailer was chiefly competing with Barnes & Noble (NYSE:BKS) and the now-defunct Borders chain.
Amazon had better book prices and offered free two-day shipping on orders that topped $25. But for those buying a single book or books totaling less than $25, the addition of a shipping charge (plus having to wait two days) made going to a bookstore a viable option. Prime let customers pay a flat fee and order as many times as they wanted no matter how small their orders were.
The free shipping alone was a huge draw in the early days. As a voracious reader, I took full advantage of Prime placing multiple one-book orders each week. As Amazon expanded into other areas, I ordered things like tea and household items partly due to the convenience and partly due to the free shipping.
Once digital books became the preferred method of reading (for me that was October 2011, when I got a Kindle e-reader) Prime lost some of its luster. For readers and people who used to order DVDs, much of that content is now delivered digitally, which takes shipping out of the equation. That trend likely led Amazon to launch Prime Instant Video in 2011 and Prime Music earlier this month.
The video service offers Prime members access to a selection of movies, television shows, and original programming. It doesn't have anywhere near the volume of content as Netflix (NASDAQ:NFLX), but as a free add-on to a Prime subscription, it's pretty good.
The same can be said of Prime Music, which offers essentially a free version of Spotify's paid offering with a dramatically smaller selection of songs. Prime Music users can either listen to playlists or select their own songs in whatever order they want (it's basically just like owning the music). With only about a million tracks, Prime Music is limited, but again, it's free.
When is Prime worth it?
Though the music and video services are nice secondary benefits, many Prime members are subscribing for the free shipping. For those customers, it comes down to simple math. Slate created a widget to help people calculate if paying for Prime makes sense.
The widget goes by the assumption that each Prime-eligible shipment costs non-Prime subscribers a minimum of $3.99 (actual costs can vary). To bring your average cost per shipment below $3.99, a customer would have to place 25 eligible orders per year. That would bring the cost to $3.96 per shipment, according to the widget, making the $99 up-front investment at least nominally worth it.
Having Prime does seem to make customers want to use it. That likely is why Prime members spend more per year with Amazon.
Will Prime members stay?
Locking customers into buying from Amazon is a key part of the company's strategy but Prime is only part of those efforts. In addition to reinforcing the benefits of Prime, Amazon has also produced devices -- Kindle Fire Tablets, the Fire TV set-top box, and its just-announced phone. Amazon is also experimenting with a wand that makes reordering groceries and other traditional supermarket items through the retailer's same-day delivery service easy. So it's pretty clear the company is not putting all its eggs into the Prime basket.
Prime is a revenue driver for Amazon. That is likely to become less important as more and more consumers buy Amazon devices or become customers of specific services like the same-day grocery offering that is currently available in limited markets.
I remain a Prime subscriber even though I rarely buy physical books anymore. I order less from Amazon, but probably still more than 25 times a year. Paying for Prime absolutely makes me want to look to Amazon (first) when I need to buy anything.
Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com, Barnes & Noble, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.