When will Costco stop expanding?

How Amazon attracts the most attractive customers

Combined with economies of scale in storage and delivery and other economies of scale, Amazon already has an inherent advantage over smaller online retailers.

But that's where it ends. Amazon can certainly work a little more effectively here and there. Warehouse employees can pay poorly - nobody else does that except Amazon in the industry - and it can advertise its own offers more. But at the end of the day, Amazon also has to work with the margin on the product sold. Amazon also somehow has to recoup the shipping costs with every order. All dealers are the same.

Correct? Not correct!

For ten years now, Amazon has been expanding Amazon Prime bit by bit. (Amazon Prime started in the USA in 2005 and came to Germany in 2007.) Originally, Amazon Prime was a fixed annual amount for which you received free two-day shipping. Even today, the core offering from Amazon Prime is free express delivery.

But Amazon Prime has long since encompassed a lot more. In addition, Prime customers get access to Amazon Instant Video, Amazon's video streaming service. In the US, Prime members can borrow one of 500,000 e-books for their Kindle every month. As a Prime customer, you also get unlimited online storage for your photos in Amazon Cloud Drive. But we're not done yet. As the name suggests, Amazon's music streaming service "Prime Music" is also part of the Prime package. The Prime package also includes earlier access to Amazon deals and participation in new programs such as Prime Now in New York or the grocery delivery service Amazon Fresh, which is available in some regions of the USA.

Movies, music, photos, books and no shipping costs. And nobody knows what will belong to Prime tomorrow.

In April 2014, the annual Prime fee was increased by $ 20 to $ 99 per year. According to Amazon, this price increase by at least a little more than 25 percent did not detract from the growth in membership numbers. According to Amazon, memberships at Amazon Prime have grown by 53 percent compared to the previous year.

Amazon Prime seems extremely attractive to customers, as you can see. No wonder: In contrast to other discount programs such as Payback and Co., the advantages of Amazon Prime - films, music, photos, books and no shipping costs - are very easy to communicate. But what does Amazon get out of it?

With Prime, Amazon can, as is possible with any form of bundling, work with mixed calculations that are denied to a provider driven purely by individual order processes. Because the shipping fees are covered by the annual fee from the perspective of Prime customers, they order more often - more freely, if you will - on Amazon. According to a recent study (PDF), Prime members in the US buy goods worth an average of US $ 1,500 a year. That's almost three times the $ 625 a normal Amazon customer spends a year.

Amazon can assume that people who order a lot will tend to Prime and, once they are Prime members, order even more. Amazon can incorporate the increase in sales and profits directly into Prime's calculation. In addition, the demand from Prime customers is more price elastic. Since you're already paying $ 99 a year for Prime, you also want to make sure it pays off. So you also order from Amazon if a product costs a little more than elsewhere. That may not be rational in all cases. But nobody always acts rationally. In this context, the power of habit should not be underestimated either. Anyone who is once on Prime and therefore prefers to buy on Amazon will not infrequently stop the price comparison with other retailers completely.

In this way, Amazon binds the most attractive customers to itself: the high-volume customers who stop looking at the price all the time.

Can't every retailer offer their own Prime? Unfortunately, no. It's not that easy. In the call for the latest quarterly figures, Amazon CFO Tom Szkutak directly confirmed what any attentive observer should have already realized. Many customers sign up for a free Prime Trial to get access to Amazon's video streaming; and quite a few remain as Prime members. Prime Instant Video is the gateway to Prime membership.

At least now it should become clear why Amazon invests a lot, and more and more, money in TV series and films. TV content is prime driver and it has two main advantages over other strategies: Once the high fixed costs (the production of the content) are covered, Amazon only has to cover comparatively low variable costs for the offer (traffic that arises from the streaming ). In addition, Amazon can easily bring series and films that it has produced itself to any country where it offers Prime. It is difficult to imagine a more attractive expansion strategy.

Which conventional online retailer can compete with this total offer? An annual fee that covers part of the shipping costs and ensures more sales per member is still conceivable. But TV streaming on top? And everything else that Amazon bundles in Prime?

Amazon is using the economies of scale that are available to the retail giant more and more aggressively. And that means a growing problem for the rest of the trade.

Jet.com, the new startup of Diapers.com founder Marc Lore, wants to try to establish a membership model similar to Amazon Prime or Costco. Jet membership costs $ 49.99 per year and promises customers 10 to 15 percent lower prices than elsewhere. Jet is a marketplace that earns from the fees per sale. Jet can, but does not have to be, prime dangerous in the long term. Whether Jet will be successful remains to be seen. The point now is that a model like Jet at least has a chance. A retailer with a tenth the size of Amazon or less, on the other hand, has little to no chance against Prime. Especially if you can't find a direct answer to Prime, which is said to have around 40 million members.

The only solution for retail is as easy to say as it is difficult to implement: business model innovation. The (shop) optimization of classic online trading, on the other hand, is a dead end. (rw)