Amazon.com's (NASDAQ:AMZN) loyalty shopping program is going so well that some folks just want to blow it up. The typically astute Harvard Business Review took some jabs at Amazon Prime earlier this week, ahead of Wednesday's Amazon Prime Day.
The article suggests that Prime -- the program where folks pay $99 a year for unlimited two-day shipping of Amazon-warehoused goods as well as other digital media goodies -- is a big reason why Amazon is barely profitable these days. Leaning on Forrester Research estimates that the dot-com darling is losing $1 billion to $2 billion a year on shipping costs to Prime customers, Rafi Mohammed suggests that Amazon tweak the model.
Instead of charging $99 a year for unlimited shipping, he offers only making the first 15 shipments available at no additional cost. Amazon could then slap a "trivial" buck per shipment after that. Amazon would then be able to offer a $149 Prime subscription that offers truly unlimited shipping.
It's a ridiculous notion, but let's get into how magnetic Prime has become for consumers. Amazon has only admitted that there are "tens of millions" of Prime subscribers, but third-party researcher Consumer Intelligence Research Partners estimates that there are roughly 40 million Prime members. Making things even sweeter, the average Prime member spends more than twice as much as the non-Prime shopper on the site.
That's a lot of subsidized shipping on Amazon's end, but is Amazon really taking a bath here? In an ideal world where all 40 million members are paying $99 a year, we would be talking about $4 billion a year in subscription revenue. Suddenly spending $1 billion to $2 billion on those "free" shipments doesn't seem like such a bad trade.
We have to be fair, though. Not everyone is paying $99 a year. Some are on trial subscriptions. Some are students, who are paying half the going rate. However, at the end of the day, it's not a bad deal for Amazon. It keeps tens of millions of shoppers close, turning to Amazon as the first and often only stop when they need to buy something. The loyal crowd also attracts merchants, including those who pay Amazon to store their merchandise at one of its warehouses so the products can be sent out as Prime shipments.
In other words, even if Prime was a sinkhole -- and it's not -- it pays off in other ways. Capping that popular programming that's clearly working with Amazon's 40 million most loyal customers is ludicrous.
There's power in Amazon's free shipping buffet. Limiting it to 15 shipments places consumers on the clock. Your gym membership, video streaming service, or warehouse club card wouldn't seem as valuable if it was operated on a hard count.
It's psychological. Even if someone were sure to go through less than 65 orders a year -- the point where Mohammed's two suggested Prime pricing plans meet at $149 -- most shoppers would go for the peace of mind of the unlimited plan at $149.
This doesn't mean that Amazon can't charge more for Prime in its present incarnation. It discovered that last year when it boosted the annual rate from $79 to $99, only to find that sales didn't skip a beat. Rolling out a 51% hike on the heels of last year's 25% uptick would be extreme, but there appears to be some degree of elasticity here. However, the notion that it should offer a scaled-back model -- Prime Lite, let's call it -- is nuts. Folks who want to measure every purchase aren't prime Prime candidates.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. 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.