The subscription business model has found its way into most consumer product categories (newspapers, music/video streaming, books, food, clothing, groceries, toiletries, cars, bicycles and more). I have given an overview of companies who have applied the subscription business model on their offerings.
While some of the larger companies still struggle to add this business model to their existing offerings, one of the largest companies has long applied it to as many of their offerings as possible: Amazon.
And not only that Amazon is investing significant amounts of capital in further improving their subscription-based offerings. Let’s have a look.
“Earth’s biggest selection”
I was talking to a friend recently who was still under the impression that Amazon is predominantly a book delivery company. If you think the same this might change your mind. Check a list of Amazon departments and you will struggle to find something that they are actually not selling.
Here is a summarised list of their offerings. In blue & bold you see everything that they are offering in the subscription business model:
- TV shows
- Amazon Web Services
- Apps, games
- Toys, kids, baby
- Apparel, sports, jewellery
- Furniture, garden, tools
- Auto, home, services
More than likely, this is also the Earth’s biggest subscription business model offering.
But let’s explore how and why Amazon is betting big on the subscription business model. Here are first some examples of their subscription offerings.
Examples of Amazon subscription offerings
Amazon’s roots were books. Kindle Unlimited gives you access to:
- over 1 million ebooks,
- the current edition of popular magazines and
- about 7,000 audiobooks.
Even though this probably is about 5% of Amazon’s audiobooks and magazines, it is a decent size compared to other, pure audiobook, providers. And as an ebook subscription model, it is a larger than any other ebook subscription offer.
Speaking of audiobooks, Amazon has acquired audible.com which are now the biggest audiobook subscription service among their peers.
They are offering (as of Feb ’17) 180,000 titles, which is larger than the other competitors as well as iTunes audiobooks (who don’t have a subscription model – at least not at this stage).
(3) Amazon Prime TV
Amazon is also in the business of streaming videos and TV shows. To make it more attractive and unique they have started creating their own exclusive TV shows. Their streaming services are available in certain countries through their Amazon Fire TV.
(4) Amazon Subscribe & Save
Amazon has long entered the delivery of groceries and packaged consumer goods, clothing, shoes, electronics, toys, furniture, auto parts, and more. But they now also have a program called subscribe & save that offers tens of thousands of household items/groceries on a subscription basis. It is a compelling offer especially if you consider the increasingly shortened delivery times that Amazon achieves.
The program has not been spared negative feedback which was mainly due to wide price fluctuations for the same items month-over-month. Prices are calculated based on availability but it can be expected that Amazon will learn to stock more appropriately once they have more data to track consumption patterns on.
“While You Were Sleeping”
These developments must be unnerving the likes of Walmart who have tried to come up themselves with a subscription business model offering. The program called Goodies was discontinued after only one year (in 2013) without providing any details to why.
All that Walmart has right now is a Beauty Box a very basic offer (and possibly not very popular neither, considering there is not even a single Facebook like on the offers webpage).
To make it work, you need to get the 12 vital elements of the subscription model right. And this might not be so easy for established companies. But given Amazon has been around some 20 years, it sure is possible and a great opportunity on top.
Amazon Prime: the master offer
Amazon Prime is their most successful offer and possibly the most lucrative subscription business model offer on Earth
On the surface, it offers fast free delivery of your purchases from Amazon. And while it has been available for some 10 years, the program has grown massively in the last few years.
Prime offers a 2-day delivery anywhere in the US and some other countries. In many major cities, it offers same-day delivery.
And even a 2-hour delivery for free in many major cities for groceries.
Amazon is building a massive delivery infrastructure and processes in order to overcome one of its last disadvantages to brick-and-mortar retailers: instant gratification or not having to wait for your order to arrive.
With 2-hour free delivery – and 1 hour for a surcharge – the disadvantage turns into an advantage. In many urban areas esp you will struggle to make it within that time to the next mall if you include traffic, parking and all the other inconveniences along the way, let alone the wasted time.
But there’s more
Here is the thing. It’s not all. Putting together all the subscription offerings, listed above (and then some), Amazon makes Prime an even move compelling offer. Here is what else they add: music, movies, TV shows, books, magazines, comics, audiobooks, games, cloud storage, exclusive early access to promotions and some food offerings.
For most categories they offer only a small part of their gigantic selection, thus it only comes at marginal cost.
Let’s take audiobooks, their audible.com offering is expected to be profitable on its own merits. Giving away a small subset of audiobooks is unlikely to cannibalise many hardcore or long-term audible users while making Prime more attractive to the broader masses. Similar considerations apply on the other inclusions of Prime. They are small enough to not cannibalise the hard-core users of the respective category while enticing many others.
According to one investment analyst, the Prime music service attracts more usage than Spotify and Apple Music together (despite a much smaller selection of titles). Some items are only exclusively available on Prime, such as early access to certain promotions. You can see how this differs to most other subscription programs. Its value lies in the skilful combination of various elements.
Benefits of the subscription business model
Some of biggest benefits of the subscription business model are more stable and predictable revenues. And this is great to plan out your investment profile. Predictable revenues entice investors
Marketwatch reports “Amazon planned to open 18 new fulfilment centres in the third quarter, part of an expansion Amazon needs to ensure it can deliver on-time to Prime customers, who pay an annual fee for free two-day delivery”
And it continues with investment plans into the content of their Prime TV: “Prime customers also receive access to Amazon’s streaming television service […], which Amazon said it plans to double spending on original content year-over-year in the second half. The Amazon Prime streaming service hopes to launch several new shows in the fall”
Stable revenues are one benefit, but subscribers are spending more than double of what non-members do:
“Analysts at Consumer Intelligence Research Partners estimate that Amazon has 63 million Prime members in the U.S., with 19 million joining since the first Prime Day last July. Those members spend more than the typical Amazon browser— on average $1,200 per year, compared to $500 per year for nonmembers, according to the research firm.”
Prime has an estimated 65 million members in the US. This would mean more than half of the 126 million households in the US are subscribers. Experts predict that Amazon CEO Jeff Bezos will continue investing in the program in order to “lock” customers into their ecosystems of products and services.
Of course, it is not just about the subscription business model. But the stable, more predictable revenues coming from Amazon Prime enable expedient investment into their delivery infrastructure. And this is a significant complementary asset (I have explained this important concept in our article on strategic IP management) that improves Amazon’s position in the competition.
“The forecast suggests that Amazon Chief Executive Officer Jeff Bezos will continue expanding a delivery infrastructure designed to get products to customers quickly, produce more video content that encourages people to join and renew Amazon Prime memberships […] “
“Retail competitors, including Wal-Mart Stores Inc., are struggling to match Amazon’s quick delivery on a wide assortment of goods as shoppers shift their spending from stores to websites and smartphones. U.S. online sales in November and December totalled $91.7 billion, up 11 percent from the previous year, according to Adobe Systems Inc.
Amazon’s big bet
Amazon’s pace of investment is frantic. Just within the last 6 months, Amazon has achieved important milestones and made further commitments into delivery infrastructure investments.
— Aviation Voice (@aviationvoice) February 3, 2017
— Jeff Bezos (@JeffBezos) December 14, 2016
Here is how Prime’s value has been assessed by JP Morgan
This article by Murat Uenlue is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
If you liked this article, please share: