When it comes to online shopping, Amazon.com (NASDAQ:AMZN) is the 800-pound gorilla in the market. But savvy shoppers know that Amazon doesn't always offer the best prices and just about every retailer offers an online store of its own.
Nonetheless, a recent survey commissioned by BloomReach found that 44% of online shoppers in the U.S. began their product searches on Amazon.com. Just 34% use search engines such as Google, and the rest use other retailers' websites. That's a pretty poor position for the Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) company, which relies on product-related searches for a big chunk of advertising. What's more, the prospects are good that Amazon will continue to gobble up product-search share.
The power of Prime
Amazon's position as the primary destination for product searches appears to be improving. A 2012 survey from Forrester Research found that Amazon was the starting point for just 30% of online shoppers. It's not a perfect comparison, considering the numbers come from two different research companies, but it's indicative that Amazon is likely gaining share.
The prime factor leading to more loyalty is its Amazon Prime service, which offers two-day shipping for a flat $99 yearly rate along with TV, movie, and music streaming, among several other benefits. Prime subscribers are growing rapidly. Management said during its fourth-quarter earnings call that it increased paid subscribers 53% in 2014.
With the sunk cost of a $99 membership and the potential to get a product quickly, Amazon Prime members are most likely to prefer buying on Amazon over another retailer. Searching other retailers to compare prices is hardly considered because of the psychological impact of being a Prime subscriber. As a result, Google and other retailers are receiving a lower share of traffic.
Google's biggest competitor
Last year, Alphabet Executive Chairman Eric Schmidt told an audience in Berlin that he viewed Amazon as Google's biggest competitor -- indicating that the company has held that view for some time. Google knows the value of product searches and continues to make improvements to make the experience on Google competitive with searching for products on Amazon.
It implemented star ratings on its product-listing ads in 2013 to provide searchers an indication of product quality. Google uses product reviews from each retailer's website, but Amazon arguably has the best collection of reviews, and Google can't access it.
Google has been working on developing a buy button for mobile shopping for some time now, with the goal of aggregating retailers and enabling a simple checkout system on mobile. This allows for easy comparison shopping and turns Google into a shopping destination instead of a starting point -- all good things to generate additional revenue.
But adding new features to search results fails to address the real issue, which is the growing Amazon Prime subscriber base. Google tried to partner with brick-and-mortar stores to develop Google Express Shopping in 2013, but the service failed to catch on and the company was forced to shutter its two delivery hubs around San Francisco while it revamps the service. Meanwhile, Amazon Prime continues to become more efficient as the retailer invests in more warehouses to enable same-day delivery and two-hour delivery in some markets.
While none of these features has pushed Google past Amazon in the competition for online shoppers, the search engine's continual push to improve its shopping experience has apparently led to it gaining share from the rest of the market. The Forrester Research survey found Google was the primary destination for just 13% of online shoppers in 2012. The new study from BloomReach suggests Google now draws about 22% (assuming 64.5% of U.S. search volume). Again, the studies may have used different methodologies, so it's not a perfect comparison.
But the opportunity is shrinking as Amazon continues to draw new Prime subscribers. Ben Schachter, an analyst at Macquarie Securities, estimates that half of U.S. households will subscribe to Amazon Prime by 2020. That would be about 70 million subscribers in the U.S. alone; not much room for Google to play in at that point.
Adam Levy owns shares of Amazon.com. The Motley Fool owns shares of and recommends Alphabet (A and C shares) and 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.