Amazon.com (NASDAQ:AMZN) has a near-perfect business model with its Prime membership program.
At its most basic level, members pay $99 for free two-day shipping on millions of items that the online retailer houses in its warehouses. It's a mutually beneficial relationship because Amazon gets enhanced customer loyalty, which leads to more spending, and the member gets fast, free shipping (along with the company's video service and a number of other add-ons).
Everybody wins. The consumers get actual and perceived value and Amazon.com makes it less likely that a Prime member will shop anywhere else. It's a system that has helped Amazon grow and one that other retailers are likely jealous of.
What is eBay doing?
The online auction site has begun tests of its own take on Prime in Germany, The Wall Street Journal reported. Though still in its infancy, the program known as eBay+ offers "free, fast shipping and returns for customers" who, according to t3n in Germany, pay €15-€20 (about $17-$22) a year. According to the Journal:
Ebay [sic] is promising better product placement for sellers' merchandise, and also discounts on selling fees and a subsidy to help cut the cost of shipping and return. Sellers will have to agree to dispatch goods on the day they are purchased and offer free returns within one month. The spokeswoman declined to disclose the price, and said eBay will have more details to share once it is introduced in the second half.
Though it sounds enticing, and the price sounds right for heavy eBay users, a potential flaw in the system comes from the fact that eBay does not process its own sales. For the new system to work, its partner sellers and retailers would have to handle delivery and customer service, which seems like a system built for problems.
What is Wal-Mart doing?
While eBay is a marketplace, Wal-Mart is a traditional retailer with a healthy online presence. The company's service will offer shipping in three days or less as a part of a subscription service that will cost $50 a year, the company told The Associated Press.
Like eBay, Wal-Mart will also be moving slowly. The new service "will be available by invitation only for now and it will offer more than one million top-selling items, from toys to electronic gadgets," company spokesperson Ravi Jariwala told AP, which noted that the company's website sells more than 7 million products.
Why is this so attractive?
Rivals want to have their own version of Amazon's loyalty program because Prime users spend more money than other registered users on the site, Amazon Prime now has 41 million U.S. members, spending on average about $1,100 per year, compared to about $700 per year for non-members, according to Consumer Intelligence Research Partners.
Will eBay and Wal-Mart succeed?
Amazon launched Prime in 2005, when the value of free shipping was (arguably) higher. As digital products became more common, the retailer supplemented the free shipping with its video, music, and other services. Had it not worked to keep the value of Prime high, it likely would have lost members as some of them stopped seeing the value in free, fast shipping.
eBay and Wal-Mart are launching cheaper services and both traffic mainly in hard goods rather than items like books, music, or video that have largely moved into digital distribution. Still, free shipping is not as it once was and both companies are likely to struggle to grow their programs beyond their most devoted users. eBay may also have problems with fulfillment as the program places stress on vendors, which may not be well-equipped to handle it.
Offering perks to your most-dedicated users isn't a bad thing -- it only ties them to you more. It seems unlikely that either eBay or Wal-Mart will build a loyalty program that rivals Prime (at least as they are currently planned) but their efforts could result in sales growth from existing, dedicated customers.
Daniel Kline owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, and eBay. The Motley Fool owns shares of Amazon.com, Apple, and eBay. 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.