History of Amazon Prime


Ex-Amazon employee, Eugene Wei, wrote this blog where he explained how and why the Amazon Prime scheme came about, and it makes for an interesting read. It started with a question years back: what is the roadblock Amazon would hit if it didn’t change anything about how it worked? The answer: shipping fees.

This may sound trivially obvious, but Amazon realized how big a deal (breaker) shipping fees was:
“People don't just hate paying for shipping, they hate it to literally an irrational degree... (even though) even after paying shipping, customers were saving money over driving to their local bookstore to buy a book… That wasn't even factoring in the cost of getting to the store, the depreciation costs on the car, and the value of their time.”

It took Amazon several years to find a solution. Yes, years! Their first stab was to launch a scheme called Super Saver Shipping:
“If you placed an order of $25 or more of qualified items, which included mostly products in stock at Amazon, you'd receive free standard shipping.”
How did that fare? Not too well. Why?
“It caused customers to reduce their order frequency, waiting until their orders qualified for the free shipping.”

Ultimately, they came up with what we know as Amazon Prime: fixed annual fee, free shipping for everything. You’d think Amazon would have done some research to check whether such a scheme was profitable for Amazon, right? That’s exactly what a data obsessed company like Google would have done, but not Jeff Bezos. He just decided to “go for it”! What made it such a dangerous decision for Amazon was the obvious fact: shipping stuff costs money. The last thing Amazon could afford was to end up in this situation:
“The more you sell, the more you lose.”
And yet, that leap of faith is what Amazon Prime was. And boy, did it pay off.

You may be wondering why other businesses don’t follow suit with Amazon Prime like schemes. Two reasons, write Wei:
1)      “It isn't easy for other retailers to match from a sheer economic and logistical standpoint.”
2)     “Very few customers shop enough with retailers other than Amazon to make a pre-pay program like Prime worthwhile to them.”

In other words, not only did the Amazon Prime scheme cause a “dramatic shift in the demand curve”, it also created a moat around the fortress called Amazon. Talk about killing two birds with one stone.

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