Why Amazon Prime is Amazing

Wednesday morning around 8:15am I ordered two books from Amazon.com. On Thursday afternoon at 1:11pm, they were delivered to my doorstep. The cost? $17.81 for book number one, $16.47 for book number two and $0.00 for shipping. A total of $34.28 for two hardcover books, hand delivered to my door not 29 hours after I purchased them from the comfort of my home office. That’s amazing!

In case you just glanced over the title of this post, it bears repeating that I’m talking about the Amazon Prime program. The difference from the regular Amazon accounts is that the Prime program requires an annual membership fee of about $79 (I think). But, for the $79 you get unlimited FREE 2-day shipping and no minimum order size (free shipping for “regular” people requires a $25 minimum purchase and you get 5-7 day delivery).

So what the heck does Amazon Prime have to do with this blog? Well, my aim is to help individuals and business people and I think there are a few good lessons with this program. Let’s look at it from two perspectives: first, the customer (me) and second, the business (Amazon).

As a (frugal) customer, you would ask yourself, “Is this right for me?” Well, here is my story.

I used to order books from Amazon when I had just a “regular” account. It wasn’t a bad experience but there were two things that really annoyed me: (1) the shipping delay and (2) the shipping fees. Even though the retail price of a book on Amazon is often cheaper than at a brick and mortar store (like Barnes & Noble) the extra cost of shipping usually offsets any difference on retail price. Plus, I had to wait for 5 to 7 business days to get my book. Why would I order online and wait for a week if I could get into my car and have the book in my possession in 15 minutes?

To avoid the shipping fees, I would try to get my order over the magical $25 barrier. This meant that I often purchased books that I didn’t necessarily want or need, just to get the free shipping. Consumers tend to justify this type of behavior thinking that, “If I just spend $10 dollars more, I can save $7 dollars on shipping, plus I get another item. I’ll have to spend the $7 dollars anyway, so it’s actually like getting the second item for only $3 dollars.” While the math may actually support this argument, pure economic theory does not (you are still spending an extra $3 dollars that you hadn’t planned on spending). It becomes especially painful if you purchase something that you don’t really need or want. It just doesn’t make sense.

Once I came to this realization I noticed two things: I purchased less things on Amazon and I purchased them less frequently. I didn’t stop buying books, I just bought them somewhere else.

So I here about Amazon Prime and the Free 2-day shipping and I get signed up. Something peculiar happens, my book buying shifts from mostly offline, to almost 100% online. Why? Because the Prime program eliminated both of my pain points. And even though there is a membership fee (more on this later), it’s almost like buying from a brick and mortar store because you don’t pay for shipping and 9 times out of 10 you get the book the next day. So the only issue at this point is cost vs. convenience. By that I mean, is the cost of the membership worth the convenience of purchasing from home (as opposed to driving to the bookstore)?

Hell yes!

The second perspective is from the point of view of the business. In this case Amazon. The question is: With the rising cost of doing business (in this case shipping and delivery fees), why would they offer a program where shipping is free when consumers have been more than willing to bear that cost in the past? Well the answer is really quite simple: a program like this makes them more money than it loses.

To see how this works, let’s go back to my example.

I had a “regular” Amazon account for several years. On average I bought maybe 6 books a year (perhaps more when I was in college but those were all purchased from third parties, not Amazon). If the average cost of a book on Amazon is let’s say $17.00 then I spent about $102 per year in books. Using my previous logic I’d usually purchase two books at a time to avoid the shipping fees so there were about 3 purchases a year, and I paid Amazon about a hundred buck.

Remember, I bought books offline too. So more money was spent in brick and mortar stores.

Since the Prime membership, I have purchased nearly 2 books per month from Amazon. Using our $17.00 per book average, that works out to $420 per year in book purchases. Compared to the roughly $100 per year I was spending earlier, that’s over a 400% increase in cash output annually from me to Amazon.

What changed? I don’t think our relationship changed. My reading habits may have increased a bit, but a 400 plus percent increase in sales? Wow!

Here is the take-home lesson for retailers:

Amazon relieved my pain points (shipping fees and delayed gratification). They lowered my transaction cost and as a result, I make more transactions. It’s really quite simple when you think about it that way. By eliminating the barriers that prevented me from making purchases, they have enticed me to make purchases more frequently. 400% percent a year more frequently.

What can you do in your business to relieve customer pain points? Can you lower transaction costs for your customers so they will make more transactions? Remember, cost doesn’t have to be money. It can be convenience or service too.

Do certain areas of your store sell more product than others? Maybe it’s a pain in the ass to get there. Reorganize your product racks so traffic flow patterns make it easier to get to every area.

Does your website suck? Does your checkout process make sense? Is it intuitive? Look at it from a customer’s perspective. If the answer is, “Yea it sucks.” or “No it doesn’t make sense.” Do something about it.

How about you? Do you have any stories like this? What are your customers pain points?

Bonus Tip: This was a long post. As a thank you for reading to this point I’m going to tell you a little secret. You want to know what the best part about the Prime program is to me? I don’t pay for it. Nope. I don’t pay the $79 per year membership fee.

Is someone in your family into books too? My father-in-law is. He told me about the Prime program. Check out this link and connect the dots.

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