Why Prime Day is vital for Amazon

Amazon is attracting buyers at its annual Prime Day sale, engaging celebrities such as Taylor Swift, Lady Gaga and Kobe Bryant to promote the two-day discount event that begins Monday.

But beyond the increase in revenue generated by customers wanting to buy electronics, clothing and cheap cosmetics, the event may be of greater value to the people it recruits. for Prime, the subscription program that customers must join to receive Prime Day discounts.

"The company fits everything to Prime," said John Blackledge, Equity Analyst at Cowen. "Premium members buy more often than non-premium members, they buy more store segments and spend a lot more. And they do not usually disable their subscriptions. "

As Amazon's revenue growth slows – to 16.9% in the first quarter, its lowest level in four years – Prime is an important factor in improving the company's margins and creating new business, especially advertising, which will fuel future growth.

Premium members worth $ 190 billion

Amazon discloses little information on the magnitude or financial impact of Prime, which has more than 100 million subscribers worldwide, but separate surveys conducted by Cowen and RBC Capital estimate between 63 and 75 million US households, or 50-60%, subscribe to Prime.

But membership growth in the United States has recently slowed, prompting Amazon to find ways to attract new members and increase the value perceived by existing subscribers for what is essentially a subscription to the store. . The company announced that it would spend $ 800 million this year to reduce shipping time to a day.

Prime Day is also a powerful access point: Cowen data shows that subscriber growth accelerated in the second quarter of this year, although it remained relatively stable last year.

In 2016, Cowen has estimated at USD 3,000 the net worth of a Life Member premium, taking into account its average monthly expenses and costs borne by Amazon. That would bring the total value of US subscribers to nearly $ 190 billion today.

Premium helps attract small sellers

But Prime is probably worth even more, thanks to the new sources of income that the company has built around underwriting.

The program has played an important role in Amazon's market growth, where major brands and small businesses sell products alongside those sold directly by Amazon.

Third-party merchants now account for 58% of gross merchandise sales. This improves margins because Amazon experiences a reduction in sales and charges fees for fulfillment, payment and advertising services, but does not have to buy inventory.

For an additional fee, sellers can join Amazon's run-time program, called FBA, where Amazon manages the storage of their products in its warehouse and sends them to customers – making them eligible for Prom's fast shipping promise. This has broadened the selection of premium members beyond what Amazon could do on its own.

Vendors say they have no choice but to pay to get the blue "Prime" label on their ads to display a high level of search results. FBA is considered the most economical way to ensure that it can meet the shipping guarantee of the program.

"To be successful on Amazon, one element must be paramount," said Deepak Mehrotra, co-founder of California Design Den, one of the best-selling cotton bedding sellers on Amazon.

Amazon can sell more services to sellers

Amazon allows some vendors to store, ship, and label their items with the Prime label, but Mehrotra said the costs and logistics of using the Amazon service are compelling.

He added that FBA was charging him between $ 6 and $ 6.50 for sending a set of sheets to a customer, against $ 9 to $ 10 for sending it himself through UPS. "On a set of sheets of 40 dollars, if the difference is 3 to 4 dollars, it is 10%," he said.

At Prime Day, vendors may offer discounts exclusively to Premium members, but they must be part of FBA to do so. This year, Amazon removes the fees charged to offer "Lightning" offers of limited duration on First Day to certain brands if they manufacture more items eligible for discounts, according to consultants and vendors.

Amazon's growing advertising sector is also benefiting from Prime, thanks to the data it has on the spending habits of its members and the time they spend on their websites, apps and devices, where they can receive ads.

"If we have a dollar to spend on advertising, it makes a lot more sense to put it on Amazon, where millions of eyes already exist," said Caron Proschan, founder of Simply Gum, a natural confectionery company.

She acknowledged that letting Amazon control customer relationships and data, such as the e-mail addresses that the company could use for marketing, is a compromise. But she said it was worth it because of the volume of sales generated on the e-commerce site.

Advertising and fast shipping fuel impulse buying

Premium members are particularly attractive to major brands looking to reach wealthy consumers who are already willing to shop. "They are heavier users and they can be more monetized than non-core users," Blackledge said. "They are more likely to convert [to buyers]. "

Mr. Mehrotra said he has noticed in recent months a "considerable improvement in the revenue generated by the advertisements" on the site. "One of the parts might be that our team is doing a good job, but I think a lot of it should be that their systems become sophisticated to place ads in the right place at the right time."

Proschan said the combination of strong advertising targeting and fast delivery offered by Prime had "eliminated many barriers to online shopping" for an "impulse item" such as chewing gum.

"Traditionally, there was this notion that people are used to buying it in the crate alley, but it was not a staple that people would buy online," he said. she declared. "But I think you can replicate this pulse experience online. You receive this announcement and it is almost the same as being in this payline, and in many ways more focused because their algorithm knows more about you. "

She added, "And because of the free shipping offered to Premium members, people are more likely to buy."