With Prime Membership Saturating, Amazon Needs to Grow Spend Per Customer
It’s become increasingly evident that Amazon.com’s (NASDAQ: AMZN) Prime membership in the United States is near its saturation point. Prime membership growth has been a steady source for Amazon to grow its retail sales, as Prime members spend more, on average, than non-members.
But with membership growth slowing, Amazon is focusing on increasing spend per Prime member. It’s seen some success. Consumer Intelligence Research Partners pegs spend per Prime member at $1,400 per year. That’s up from $1,200 per year in late 2016. Evercore analysts estimate that Prime households spend an average of $2,500 per year, but it sees the potential for Amazon to increase that number to $4,000 in the future. (Note that CIRP’s estimate is based on individuals while Evercore’s numbers are based on households.)
Here’s how Amazon’s working to grow spend per customer.
Image source: Amazon.com.
One-day shipping
CFO Brian Olsavsky told analysts the company was investing to evolve Prime two-day shipping to one-day shipping back in April. About a month later, the company announced that it already has 10 million items available for one-day shipping from coast to coast. The company is also continuing to expand its Prime Now service, which delivers groceries and household items to members' doorsteps the same day they place an order.
One-day shipping will help Amazon win sales it would’ve lost to brick-and-mortar competitors such as Walmart (NYSE: WMT) or Target (NYSE: TGT) for convenience items. Both companies have fought back against Amazon Prime, creating their own Prime Now-like services. Target acquired Shipt a few years ago and recently integrated the same-day delivery service with its online store. Walmart recently launched its own same-day-delivery subscription service to capitalize on the popularity of its online grocery platform.
While Prime is more expensive than Target or Walmart’s service, it also offers a broader range of services and product selection. As long as Amazon can remain the most convenient option for Prime members, it ought to win additional sales and keep its subscribers from flocking to Walmart or Target’s subscription delivery options.
Subscriptions
Amazon has made a push to offer more subscriptions to Prime members over the past few years. That includes both digital and physical goods. On the digital front, Amazon offers Music Unlimited and Kindle Unlimited for music and books, respectively. It also offers Prime Book Box for kids and several toy subscriptions. And it enables customers to subscribe to third-party subscription boxes.
Amazon also offers Prime Wardrobe, which is similar to a fashion subscription service like Stitch Fix (NASDAQ: SFIX). Amazon allows customers to load up a box of select fashion items and gives customers seven days to try them on at home. They can keep the ones they want and return the ones they don’t for free.
It’s easy to see Amazon turning Prime Wardrobe into a subscription service where it sends custom picks to customers just like Stitch Fix. For reference, Stitch Fix’s run rate last quarter was about $527 per client per year. That presents a massive opportunity for Amazon.
Amazon has also experimented with meal kits, and it might explore offering subscription meal kits in the future.
Continued investments in subscription products for Prime members will not only increase average customer spend but also make Prime membership stickier.
Subscriptions are as much about convenience as one-day shipping. The convenience of a subscription that selects items for you and delivers them automatically, or one that gives you unlimited access to everything, is unlike anything else. And for those items Amazon can’t curate, Prime members can order them and often receive them the next day. Continued investments in convenience ought to drive sales per member for the foreseeable future.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Stitch Fix. The Motley Fool has a disclosure policy.
