Amazon (NASDAQ:AMZN) makes almost twice as much money per person from its Prime members than from regular customers, which helps explain why the company has subtly made its free shipping deals a bit less attractive for non-members.
It's a strategy that makes some sense for the online retail powerhouse, but it could backfire if it induces more of its casual shoppers to check out online rivals. One obvious beneficiary of that would be Target (NYSE:TGT) , which has recently stepped up its digital game significantly.
It's a question of balance for Amazon. The company wants to push people toward spending $99 a year for Prime, because those customers who join spend on average about $1,100 per year, compared to about $600 per year for non-members, according to data from Consumer Intelligence Research Partners. But it also does not want to drive away the casual users who actually pay for shipping on orders below a certain dollar value.
What did Amazon do?
The online retail leader raised its free shipping threshold for non-Prime members to $49 from the previous $35. It did include an exception -- any order containing $25 in books will also ship free -- but generally, the company tweaked its deal to the detriment of small-time shoppers who are not Prime members.
Target offers free three- to five-business-day shipping on all orders over $25. Amazon's free shipping not only requires spending twice as much, but also has a five- to eight-day delivery window. Both companies offer their free shipping customers the option to spend more for expedited delivery, but only Target has stores that accept returns of online orders. Target also offers free shipping to any customers who pay using REDcard, the chain's store credit card, with no minimum purchase required.
The changes Amazon made have further opened a window for Target, which set its $25 threshold for free shipping during the holiday season, and has elected to keep it going.
Why is Amazon doing this?
Based on its latest estimates, research firm Consumer Intelligence Research Partners says Amazon has about 54 million paying Prime members taking advantage of its free two-day shipping and other perks, about 47% of its total customer base.
Essentially, one Prime member is worth as much to the company as two non-members, and that 47% number offers plenty of room for growth, which makes it logical for Amazon to nudge people toward membership. But if casual customers decide it's a better deal to just spend $25 with Target to get free (albeit slower) shipping, that could deal a blow to Amazon's bottom line.
Target is on the rise
Target has invested heavily in its e-commerce operation under new CEO Brian Cornell, and that has paid off. The retailer achieved a 34% increase in online sales in the fourth quarter, Bloomberg reported. The company was very aggressive during the holiday season, offering more than a week's worth of "Black Friday" deals, and cutting all online prices by 15% on Cyber Monday.
The biggest challenge for Target may simply be creating consumer awareness about its e-commerce shipping deal. It can do that through advertising and in its stores, but changing user behavior online -- where many consumers reflexively buy from Amazon -- will not be a short-term effort.
Still, change is possible, and Amazon has practically invited Target to try to pick off its non-Prime, small-order customers. For those users, Target.com is a much more attractive option, and at least some of them are likely to at least sample what it has to offer.