Amazon Prime: The Future of Customer Loyalty Programs?

One thing you can depend on: Amazon will continue to shake up the online and even the offline retail world by innovating tirelessly and taking risks that would make most retailers shudder.

The recent spate of Kindle variations, including the hot-selling Kindle Fire, put Amazon squarely in competition with the iPad and similar tablets. As I wrote in October, I believe they are not new products as much as they are new entry points into the burgeoning world of Amazon’s digitally-delivered media.

Amazon applied the same kind of breakthrough thinking to Amazon Prime, its customer loyalty program, which it introduced in 2005. It is an approach worthy of close study by all online marketers, because it represents a direction for customer loyalty programs that could one day become the norm.

Customer loyalty programs were first popularized in the frequent traveler niche and became widely known as a “points” game in which customers get credits from airlines, hotels, credit card companies and the like redeemable for merchandise. For the most part, these programs are “free,” but they are of course designed to induce customers to continue to purchase from the program provider.

Amazon Does It Differently

Amazon, always the contrarian, decided to do things differently. Instead of launching a free program that would lead to the huge liability of unredeemed points, Amazon introduced a new concept to appeal its repeat customers: Pay $79 annually and get free two-day shipping on millions of items with no minimum order size. This ingenious approach immediately leveled the playing field for frequent buyers, because it basically removed the two big barriers to online purchasing: shipping charges and lengthy delivery times. By 2009, Amazon Prime had 2 million members, according to some estimates. That number tripled to 6 million members by 2010.

That was just the beginning. Since February, Amazon has been turning Prime into an online incentive for digital media. Early this year, the company added movie and TV streaming to the Prime membership, whose cost has not increased since its introduction. This month, Amazon added the “Kindle Owners’ Lending Library,” cleverly nudging Prime members to purchase a Kindle, if they didn’t already own one, so they could gain access to eBooks on loan. This idea pushed the envelope so far that some authors and publishers have cried “foul!” In fact, the Authors Guild accused Amazon of “boldly breaching its contract” with publishers.

According to the Wall Street Journal, though, Amazon is executing the lending library by “paying flat fees to some publishers for the rights to lend books, but for some titles the company is buying a digital copy every time a customer borrows a book.” The Journal also makes a stunning revelation about Amazon Prime, claiming that the company “is willing to lose hundreds of millions of dollars a year on the program” because Prime “drives business.” Piper Jaffray Senior Research Analyst Gene Munster told the Journal he thinks Amazon spends more than $90 a year for each Prime customer even though it charges just $79 annually. David Sellinger, who formerly worked for Amazon, told the Journal, “They’re going deeper [with Prime] on the thesis that if they can make [customers] more loyal, they can make more profit, even if they have to subsidize.”

Loyalty at Any Price

You might consider this a kind of “customer loyalty at any price” strategy, but in the long run, it keeps millions of customers coming back to Amazon. That’s essential, because now that Amazon sells not just books but virtually everything online, it falls prey to much broader competition. The company knows that delighting customers is its ultimate edge, and it is likely to keep adding benefits to Amazon Prime to do just that.

While the typical online marketer is surely not in a position to lose a ton of money on its customer loyalty program, there are some aspects of Amazon Prime that can be applied by any retailer. Think about how you can leverage these key attributes:

  1. Amazon Prime cleverly bridges the gap between hard goods (free two-day shipping) and digital goods (unlimited instant videos and free eBooks). That means a customer can be buying either traditional merchandise, downloads, or both and still benefit.
  2. Amazon Prime eliminates the complexity of points, which involves collection, tracking, and redemption. Instead, it offers benefits that relate directly to preferential service. In so doing, Amazon Prime  redefines the basic premise of a customer loyalty program.
  3. Amazon Prime works on a paid subscription basis. This provides an on-going revenue stream from the program for Amazon. More importantly, it qualifies customers for the loyalty program, because they’re paying to get something of added value. This is like gold to a retailer — the customer is paying for the privilege of better service and, in so doing, is expressing a willingness to continue to shop with that retailer. Fiona Dias, VP for an Amazon competitor, Shoprunner, Inc., tells the Wall Street Journal she estimates that up to 40 percent of the company’s domestic revenue (some $18.7 billion in 2010) can be attributed to Prime members.

Once again, Amazon has broken the mold and created a new kind of customer loyalty program. Time will tell whether the company’s investment in its most loyal customers will pay off in increased profits.

About Barry Silverstein

Barry Silverstein is a freelance writer/marketing consultant. In addition to writing for ReveNews, he is a contributing writer to Brandchannel.com, the world’s leading online branding forum. He is the author of three marketing books, The Breakaway Brand (co-author, McGraw-Hill, 2005), Business-to-Business Internet Marketing (Maximum Press, 2003) and Internet Marketing for Technology Companies (Maximum Press, 2003). Barry ran his own Internet and direct marketing agency for twenty years. You can find Barry on Twitter @bdsilv.

One Response to Amazon Prime: The Future of Customer Loyalty Programs?

  1. davids says:

    A new customer loyalty concept businesses are starting to use is providing codes/cards to customers after every purchase.  The difference is that the codes are entered online via 3rd party web-based loyalty program (Cinco Squared).  The customer then hits a button and watches images of prizes go through a cool sequence and one is randomly chosen.  This page is branded with the business lot, etc and prizes are completely customizable with anything a business wants.  What is great about this is that businesses can define the odds of each discount/prize.  The chance to win a big discount or prize is very appealing to customers.  The ability for businesses to throttle discounts makes this a much more profitable program.  Other features like collecting customer email addresses and the ability to run multiple discount tiers is pretty slick.  Cinco Squared is probably the most affordable program available.