Amazon (NASDAQ:AMZN) continues tweaking the value proposition for its Prime members.
When the service began, it cost $79 a year for subscribers to receive free, two-day shipping on millions of Amazon items. As digital delivery made free shipping less relevant for some customers, the online retailer added free video and streaming music services to Prime, which now costs $99.
Now, the company has transformed Prime a step further by launching Amazon Elements -- a line of "everyday essentials" available only to Prime members. Starting small with just diapers and baby wipes announced, Elements is a warning shot to Amazon's vendors who face increasing competition from the retailer itself.
Amazon is marketing Elements items as high-end goods and allows buyers to track each item's specific ingredients and its origins, date and place of manufacture, date of delivery, and its "best by" date -- all through Amazon's mobile shopping app. This offering generated directly from consumer feedback. "The two things customers told us they want are premium products that meet their high standards, and access to information so they can make informed decisions, Amazon Elements offers both," Amazon.com Consumables Vice President Sunny Jain said via press release.
How do the costs compare?
This is not Amazon's first foray into selling products under its own label. The company also offers Amazon Basics, a line of cables and technology accessories, that are well-made, decently priced (generally cheaper than official Apple cables), and more reliable than some third-party, low-price cables.
But unlike the Amazon Basics line, which is available to all Amazon customers, Elements products are strictly reserved for Prime members. Despite this exclusivity, the retailer's prices stack up well with name brand diapers offered on the site. (Amazon also offers discounts for monthly subscriptions, but for the purpose of comparison, we'll use a monthly one-time purchase.)
|Size 3 diapers||Amount||Cost||Cost per diaper|
|Huggies Little Movers||174||$44.49||
As you can see above, Amazon has created a competitive offering that it's billing as a premium product. By marketing to a user base with consumer loyalty and cutting out a middleman (in this case, the retailer), Amazon can pad its profit margins, offer extra value to its best customers, and perhaps even force vendors to lower prices.
So why stick with Prime members?
Prime subscribers spend almost $538 a year versus the $320 per year spent by non-subscribers, according to a June 2014 study conducted by RBC, which surveyed over 2,000 Amazon.com shoppers. The chart below shows that those who spend less than $50 per 90 days with the online retailer are less likely to be Prime members, but those who spend over $50 in the same time frame are more likely to pay for the Prime subscription. Amazon Elements could provide the extra incentive that leads more customers to Prime.
Amazon may just be getting started
Amazon will likely expand its Elements product line to bolster Prime's customer retention if diapers and wipes sales perform well. Of course, the quality of these items and concerns over brand loyalty could impact success. But by launching Elements, Amazon is opening up a new area of business and incentivizing Prime members not just to stay, but also to spend more.
For subscribers who use Prime for free shipping, it's easy to calculate if renewing a subscription is worth it. But for subscribers who watch videos, listen to music, and buy some Prime exclusive items every month at a competitive price, the $99 annual subscription seems increasingly appealing.
Daniel Kline owns shares of Apple. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. 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.