And they're running out of time

By Michael Wade
July 11, 2017

It is too early for Amazon to declare victory for its 3rd annual Prime Day, but the signals look good. Revenues from the highly discounted sales during the 30-hour event are likely to top $1 billion for the first time. A big chunk of the sales will involve Amazon’s own products, like the Echo, Dot, and Kindle. And that is the real prize for the company. While Black Friday is about volumes, Prime Day is about platforms.

Amazon already controls the largest U.S. online marketplace, accounting for about 40% of all online retail transactions. However, in order to maintain the 20% annual revenue growth it has promised the markets, it needs to add about $28 billion in new revenues each year. Amazon Prime is a great way to get there.

Prime subscriber numbers are hard to come by, but most sources estimate that there are about 80 million Prime members worldwide, most of them in the U.S. Each member pays about $100 per year for free two-day shipping and other benefits, like preferential access to Amazon’s content libraries. Thus, Prime accounts for about $8 billion a year of direct revenues to Amazon AMZN . However, that is just the beginning. Prime members spend about twice as much annually as non-members on Amazon sites—about $1,200 compared to $500. Thus, Prime members account for a massive $96 billion of Amazon’s $135 billion in annual revenue.

Prime Day deals are only available to Amazon Prime members. For this reason, Prime Day has always been more about driving new Prime memberships than new sales. By this yard stick, the annual event has been phenomenally successful. Even though Prime has been around for 10 years, Prime memberships have doubled since the first Prime Day in 2015.

Prime membership is also a great way for Amazon to distance itself from online retail competitors like Walmart and Best Buy, who have less robust platforms, and from manufacturers, like Apple and Samsung, whose e-commerce businesses are relatively weak. Apple, for example, has largely failed to leverage its two largest platforms—iTunes and the App Store—into more mainstream consumer marketplaces. The size of Amazon’s e-commerce business and the lock-in effect of Prime create very powerful network effects.

However, the focus of Prime Day will soon need to change. Now that about one quarter of U.S. households have Prime memberships, Amazon is reaching natural demographic limits to growth. Thus, Amazon will have to move from a focus on signing up new Prime members (a hunting strategy) to increasing the share-of-wallet of existing members (a farming strategy). As we have seen by the shifts required in the telecom business when mobile phone penetration approached 100%, hunting and farming require very different skill sets.

 

Fortunately for Amazon, good farming practices, like providing excellent customer service, are already in place. However, it has a long way to go before the promise of ‘Christmas in July’ can be fully realized. It is also worth mentioning that Amazon is a relative global amateur in the branded sales day arena. Alibaba realized $18 billion in revenues on its ‘Singles Day’ in 2016.

Amazon has a good head start with Prime Day, but its lead is not unassailable. By restricting the deals to Prime members only, Amazon excludes the majority of the population in the U.S., Canada, Europe, India, and elsewhere who have not joined the service. To occupy this new market opportunity, competing Internet giants (like Google and eBay), retail marketplaces (like Walmart WMT , Best Buy BBY , and Carrefour) and manufacturers (like Apple AAPL , Samsung, and P&G PG ) will need to band together. If history is anything to go by (recall the failure of the music industry to join forces with upstart platforms like Napster, Apple, and Spotify), this will not happen, and thus Amazon will be well placed to win the Western online e-commerce war by default.

Michael Wade is director of the Global Center for Digital Business Transformation at IMD, and co-author of Digital Vortex: How Today’s Market Leaders Can Beat Disruptive Competitors at Their Own Game. He is not an investor in any of the companies noted in this article.

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