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Amazon announced plans on Friday to move its Prime Pantry service away from a flat fee of $5.99 per box to a $5/month subscription model. Prime Pantry delivers non-perishable household goods to customers in limited-capacity shipments.
Previously, Prime Pantry users were always looking to optimize their shipments by fitting as many items into a shipment as possible to get the most out of the $5.99 shipping fee. But it was time-consuming and mentally taxing for customers to maximize the box contents. By moving to a subscription service, Amazon can count on consumers placing orders more frequently so they can make the most out of the subscription, rather than painstakingly building a shipment they might abandon because of the effort.
Besides more predictable fee income, the benefit for Amazon in shifting to a subscription model is that the consumer has consciously or unconsciously made a decision to regularly use the service, or at least use it enough to offset the monthly subscription. In this way, Amazon increases the average order value and customer lifetime value of each subscriber. This effect is seen with Prime members, who spend an average of $600 more per year on Amazon compared with their non-Prime counterparts.
AMAZON’S SUBSCRIPTION MODEL TAKES AIM AT OTHER RETAILERS
For retailers trying to compete with Amazon, it is another blow. Amazon has rolled out subscription programs for household staples (Prime Pantry), grocery and product (Amazon Fresh) as well as a widening range of products available to buy on Amazon through the Prime program. This means brick-and-mortar retailers are losing as consumers have less reason to visit physical stores to buy products. Other online retailers suffer too. As the psychological lock-in effect from subscription models takes hold, consumers are less willing to pay shipping fees on products they can’t buy as part of their subscription.
Amazon is presumably losing money on fulfilling Prime orders - no-one can ship a 48 pound box of household goods for even close to $5.00, even Amazon themselves. The service is not inherently profitable, but that has never been Amazon’s main game. Following their corporate playbook, the drive toward subscriptions is designed to increase adoption of the core Prime service (of which almost 50% of US households are already members), create a psychological lock-in effect for consumers, and freeze out the competition.
To compete on the consumer inertia created by these subscription programs, retailers need to identify and leverage unique differentiators that Amazon doesn’t have. Physical stores can throw events and offer in-person services that Amazon can’t. Online retailers can offer unique product assortments that aren’t available on Amazon, collaborate with online influencers on marketing and even developing limited-edition product lines. And all retailers could benefit from making guarantees around the authenticity of their products and playing up Amazon’s recent issues with counterfeiting on the marketplace.
AMAZON SUBSCRIPTIONS MAY BE GOOD NEWS FOR BRANDS
Subscriptions offer a predictable source of revenue that is rare in the world of retail where many companies make the bulk of their total annual revenue in the last three months of the year.
Beefing up their subscription service offerings could be beneficial for companies and brands who supply Amazon inventory, who benefit from the psychological lock-in effect that subscriptions have on consumers. Once you’re spending part of your household budget on a subscription, you feel compelled to make the most of it.
Brands who sell on Amazon stand to realize incremental increases in sales as consumers take out these subscriptions and spend more on the Amazon platform over their lifetime. Companies who continue to invest in making their products easy to find and attractive to customers will benefit from further entrenchment of Prime subscription programs in US households. But companies who primarily distribute their products through brick and mortar retailers may come under more pressure if wholesale purchase orders start drying up as a result of less foot traffic and online orders through these channels.
To make the most of Amazon’s foray into subscriptions, brands need to optimize their presence on the platform so their products are discoverable and compelling to subscribers. There are several programs and promotions that brands can use to get traction here, including Amazon’s own “Subscribe & Save” program which many brands are eligible to enroll products in.
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