Amazon.com's (NASDAQ:AMZN) Prime members spend an average of 140% more than non-Prime customers every year on the company's site. Amazon is always looking for ways to increase its Prime offerings to retain existing members and sign up new ones, and a discount on video games is the latest tactic.
Another Prime perk
Prime members are uniquely valuable to Amazon because they spend an average of $1,500 a year on the site, compared with $625 for non-members. Free two-day shipping was the first perk offered in exchange for a yearly membership fee. That on its own was enough to get millions of people to sign up. Since then, the benefits of Prime membership have expanded far beyond free shipping.
Keeping existing customers happy and attracting new ones requires Amazon to offer multiple services. Two-day shipping may not persuade one family to sign up, but the addition of free streaming videos may tip the scale. For another family, the ability to rent one free book a month from the Kindle Lending Library coupled with free cloud storage for photos may get the job done.
A Prime perk doesn't have to lead to sign-ups on its own to be effective. This is the case with Amazon's recent offer of 20% pre-ordered and newly released (within two weeks) physical video games for Prime members. This added perk should help retention and could lead to three sets of new members who might not otherwise have joined.
1. Members who already pay for Prime
As a Prime member myself, I know there's a psychological benefit to getting new perks for a program that I've already paid for. I'm happy with free shipping, streaming videos, music, and the occasional book rental, and already think $99 a year is a steal. Additional perks make the thought of not renewing inconceivable. I can't wait to see what's added next year, five years, and 20 years from now.
Amazon should benefit by increasing sales of new games as well. If a new game release appeals to someone, that person might wait a few weeks or months, see if he or she really wants it, and make a decision then. This situation leads to the possibility that the person changes his or her mind or forgets about it. The 20% discount is a juicy carrot that should lead to higher sales volume on launch day and the two weeks that follow. Amazon will suffer some margin contraction -- when has that ever stopped it before? -- but it will increase video game revenue.
2. Die-hard gamers
For gamers who purchase dozens of new games every year this might be a strong enough perk on its own to get them to join Prime. A new console game generally is priced at around $60. An average $12 savings per game and the $99 yearly Prime membership starts paying for itself after nine purchases. It's unlikely that these members won't enjoy other Prime perks, but this offer alone would probably be enough to entice subscriptions.
However, there's a more tailored offering for gamers who don't require any of the other Prime benefits. Best Buy (NYSE:BBY) offers a program called My Best Buy Gamers Club. For $30, members receive 20% off new video game software for two years.
For a gamer who already subscribes to this club, the Amazon offer effectively knocks $15 per year off the price of Prime. Now, instead of needing to receive at least $99.01 of annual value, a former Best Buy member will need only $84.01 in benefits from his or her Prime membership to make it a rational investment.
3. Customers on the fence about joining Prime
Some customers might not buy enough for free shipping to be worth $99. Perhaps the streaming video offerings aren't their cup of tea. These are the types of customers Amazon must continue to bombard with additions to Prime. If Amazon can succeed in getting half of all U.S. households to become members by 2020, it will need to make the overall value proposition of Prime so compelling that the component pieces don't matter all that much.
Ship a half dozen packages a year, stream some music during a twice-weekly run, watch one or two Amazon original shows with your family, read two free books, keep your vacation pictures safely stored in the cloud, and save $12 when you buy a video game for your grandson for his birthday. Taken individually, none of these might be enough to get the average American to sign up for Prime. But taken together, it becomes a no-brainer.
In short, discounts on video games will lead to more sales of video games, will attract a portion of die-hard gamers into Prime's warm embrace, and will make existing members feel like their annual fee is going even further.
James Sullivan owns shares of Amazon.com. The Motley Fool owns shares of and recommends 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.