Amazon is one of the very few companies in the world that keeps asking itself one question over and over again: what is the next thing we can do? It doesn’t have to be a big thing each time, but none of them are ever too small for Amazon to offer.
In a recent press release, Amazon said that they have added yet another benefit for Prime members called Prime Reading:
“Prime members can now enjoy unlimited reading from a rotating selection of books, magazines, comics and more – at no additional cost. Prime Reading joins the growing list of all-you-can-eat benefits for Prime members including unlimited fast, free Prime shipping, unlimited access to Prime Video, Prime Music, Prime Photos, Audible Channels, early access to Lightning Deals and more. Members can start reading now by downloading the Kindle app for iOS and Android or using any Kindle or Fire tablet. To learn more about Prime Reading or start a 30-day free trial of Prime, please visit amazon.com/primereading.”
A lot of companies do ask that question, but if you had been watching Amazon closely for the last few years, you’d have seen that the company keeps expanding at an alarming rate. Whether it is a new country they are expanding their retail operations into, or the next warehouse they are adding, or the list of services they keep launching every year for Amazon Web Services, or the next benefit that is going to be added for Amazon Prime members, the additions never stop.
There’s also a flipside to that, of course, and Amazon knows this only too well. Failed projects are part of their growth story: the Firephone, their attempts to get market share in China and so on. But, as founder and CEO Jeff Bezos said in an interview with Business Insider, they’re not scared of failing. And this is the essence of their success.
Amazon Prime is a vital cog in Amazon’s retail works. Once a user has paid for the membership, they are then incessantly encouraged to take advantage of a growing list of benefits. By doing this, Amazon not only sees average spend per user go up, but it actually helps reduce their shipping costs over time. So the lure of free shipping alone, in many cases, has helped bring over more people to the fold. According to a survey by RBC, nearly 78% of the people who took the Prime membership last year did so because of the Free 2-day shipping. And, as you can see from the graph below, that’s not just a one-off thing.
Normally, you would expect that to take a big bite out of their profits, and it does to a great degree. However, Prime members tend to spend at least 50% more than non-members when they shop at Amazon, so the economies of scale eventually catch up and help reduce shipping costs.
So now, what Amazon is doing is adding even more services to the hugely popular membership program to give their non-member customers bigger and bigger excuses to join the party. As it grows, not only will shipping costs come under control, but Amazon will have more power to negotiate better prices from its suppliers. In turn, that will help expand their bottom line.
We’re already seeing the effects of that scale on Amazon’s quarterly profit margins for their North American retail division, which have been steadily in the black for the past few quarters. And it’s going to continue expand as Prime becomes even bigger than it is today. At the rate they’re going, even a 10% increase in Prime membership fees every year won’t pinch users if the company keeps adding ten services a year on top of what’s already there.
The whole idea is to bring people in and keep them in. Once a customer goes Prime, Amazon sees no reason they should go anywhere else. That’s the motivation behind constantly innovating and adding services.
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With such an attitude, it’s no wonder people are speculating that Amazon might just become the first company in the world to reach a market capitalization of $1 trillion. In fact, one venture capitalist says that this figure could actually be $3 trillion by 2025:
“ Palihapitiya, CEO and founder of Social Capital LP, speaking at the Sohn Investment Conference in New York Wednesday, said Amazon was a “multi-trillion dollar monopoly hiding in plain sight”. He predicts that within 10 years the company will be worth $3 trillion.”
