Why does Amazon push its consumers to get Prime when they take a loss in shipping costs?
Unlike brick and mortar retailers, Amazon is an online first commerce platform, and aims to reduce any friction that customers might have in purchasing online. Predictive analytics research persistently shows that a large number of customers abandon a shopping session when fast and free shipping is not available.
Promoting Prime and taking a loss on shipping costs are not necessarily correlated though even if retail data analytics might have lead Amazon to couple them. Amazon has strategically chosen Prime as a loyalty program, with the intent of increasing it’s business moat over time. Customers love Prime because of all the fun perks, including fast and free shipping they receive. Amazon in turn retains a loyal customer.
There are competitive advantages in offering fast and free shipping although a retailer takes a loss on shipping costs. Online commerce continues to take share from brick and mortar (physical stores). In 2018, online commerce accounted for 10% of total US Retail Sales. That figure is expected to go to mid teens or higher by 2021.
Amazon can afford to offer fast and free shipping since they have other businesses – AWS, Marketplace and Advertising – that compensate for the margins lost in providing free shipping.
Brick and mortar retail businesses on the other hand either lose business to online competitors or end up impacting margin when customers purchase product from their online commerce platform instead of their physical store.
Since they usually do not have other high margin businesses to fall back on, retail stores not investing in predictive analytics are competitively weakened by this shift online coupled with the margin impacting free shipping offers.
Smart retailers, Amazon or some omni-channel retailers are continuously investing and partnering with consumer data analytics and predictive analytics expertise to consistently reduce the cost of shipping and time to doorstep.
A recent case study we did for an omni-channel retailer touches upon how consumer data analytics and it’s predictive analytics capabilities have been leveraged to cost effectively offer what customers love – fast and free shipping.
Fast and free shipping is here to stay. Smart retailers understand that it is important to provide what the customer expects. They compensate the impact of that by investing in retail data analytics and supply chain and fulfillment optimizations to reduce costs and time.