Thread by @FinEklavya

The Story of Amazon Prime

How Prime became a money minting machine for Amazon.

Decoded!🕵️

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“This is a big idea”, Bezos was brimming with energy as he said this to his team.

The employees realised that something huge was coming their way, but nobody knew it was going to change the entire future of consumer behaviour.

16 years ago, Amazon announced Amazon Prime to the world & since then, the company has never been the same.

Today, Amazon is the most valuable online retail behemoth with a market cap of $ 1.7 trillion. No matter the product, the time or the day, you name it & Amazon has it.

Amazon wasn’t an everything store since forever. In the fall of 2004, it was still mostly selling just books and DVDs. Shopping may be just a click away today but back then, it was no less than a hassle to place an order at Amazon.

The shipping cost was extremely high & would take around 8-10 days for delivery.

To avail the benefit of free shipping, a customer would not only need to order more than $25 worth of products but also, should be able to meet the never-ending criteria list set by the company.

The entire process was so cumbersome that not shopping at Amazon seemed like a better option to the customers over grilling through the free shipping selection process.

Customers began to defer their orders which did not meet the minimum criteria set by the company. The idea was to delay their orders till they have enough products in their cart to be qualified for free shipping.

This started to impact the company’s sales extensively as the customers started cancelling the potential orders which otherwise would have qualified as an impulse buying.

It was during this time that Jeff Bezos met the CEO of Costco.

The retail giant Costco has built its empire on the back of subscription-based ‘Membership’ model- a brilliant strategy that has generated uninterrupted cash flows and a huge loyal customer base for the company.

Bezos was mesmerized by the magnificence of ‘membership model’ and at that moment, he decided to introduce a similar model in Amazon.

The idea was to ease the process of shopping at Amazon so much so that even a 10-year old could easily place an order.

The first thing he did after discovering this concept was to call an urgent meeting with a bunch of his employees.

With the kind of conviction that he spoke to his management, they knew that Bezos was certain that this was going to work.

Employees were thrilled to hear the plan and were ready to take on the project.

The management was getting restless as there were only a few weeks left to the earnings call and they were supposed to discuss the company’s financial results for the last quarter.

Suddenly, an employee stood up & blurted "we should have it ready by the next earnings".

Everyone was shocked to hear the employee as there was no way they could prepare the product in such a short time.

Surprisingly, Bezos replied "that would be a great time".

Bezos reassured his team that he will manage to delay the earnings call by 2 weeks giving them a total of 6 weeks to work on the project.

Looking at Bezos, the team was convinced that no matter how huge this challenge was, they had to execute the plan by hook or by crook.

The project was supervised by Jeff Bezos himself and was named ‘Futurama’.

In order to expedite the process, employees were given full liberty to poach the best talent from any of the departments they wish to.

Since not everybody knew what Bezos was up to, this spurred real tensions inside Amazon. Some managers resented that their projects appeared to be deprioritized for a secret program they knew little about.

On the other side of the table, there was a palpable excitement and dedication in the employees working on the project.

They used to enter the office wearing a T-shirt that said ‘Futurama’ on front and ‘shipping in 6 weeks or less, guaranteed’ on the back.

They were working for 20 hours a day; grinding and grueling to give shape to Bezos’ idea.

Finally, the staff was able to put together the idea and could launch a minimum viable product.

The product was named - Amazon Prime.

Amazon Prime was released as a membership program providing customers free shipping and a 2-day delivery plan in return for an annual membership fee of $ 79.

“2-day delivery” was a new and revolutionary concept in itself. No other company was even in the position to provide the products so quickly which gave the customers an added incentive to shop at Amazon.

Thus, it became an alternative to the immediacy of brick-and-mortar stores.

The service was applicable on 30 million products the company was dealing in then. It was an all-you-can-eat buffet with free shipping, Bezos said.

An email was sent to all his customers describing the Prime service:

Bezos understood the enormous value of reducing the complexities for the customers to shop and thus, making them loyal towards the company.

However, Bezos’ idea did not gain much internal acceptance in the beginning.

On the face of it, the idea seemed to be an unprofitable undertaking. Before Prime, the company used to charge $9.48 for a 2-day delivery so, if a customer orders more than 10 times, the company would be losing money on each such customer.

The Finance department of Amazon feared that Prime would turn into a big money guzzler and may eventually end up being a dead elephant.

However, Bezos stood his ground and gradually, things started to unravel in his favor.

To the management’s amazement, customers started spending more money once they became the members of Prime.

Through a survey, it was found that on average, Prime members spent $ 1,400 on the online shopping platform every year, compared to the $ 600 for non-Prime members.

This ensures that once a subscriber experiences the benefits of free delivery - & is in the process of purchasing from Amazon - the temptation to shop elsewhere diminishes.

With this, Amazon single-handedly - & permanently - raised the bar for convenience in online shopping.

The company didn’t just stop at providing free delivery to their customers, rather they kept on adding more and more features to Prime making it all the more valuable for their members.

This includes access to thousands of streaming movies and TV shows with Amazon Prime Video (2006), Amazon Music access (2007), Prime Pantry (2014), Prime Photos (2014), Prime Reading (2016), and much more.

Recently, Amazon acquired MGM studios for $8.5 Billion to dive deeper into the Entertainment industry.

It is hell-bent on emerging as a market leader in the entertainment industry and has been heavily investing in original content to fend off its rivals.

In 2020, Amazon alone spent $ 11 billion into video streaming and music content which is larger than the combined investment of the entire Hollywood producer cult.

Amazon has truly taken Hollywood by storm and there’s no stopping them.

While companies like Netflix and Hulu are competing for a single market, Amazon has been playing a different and much larger game altogether.

Prime is an agglomeration of various services under one roof. No one can think in their wildest dreams to provide such valuable propositions under a single service and still manage to stay massively profitable.

From online shopping to video streaming to music, Prime is entering and thriving in each segment and has managed to give the market leader of each industry a run for their money.

Currently, Amazon Prime has a user base of more than 200 million churning out revenue of whopping $25 billion for the company.

In 2018, Amazon increased the US Prime membership fee from $99 to $119. In June 2019, the company introduced the 1-day delivery with Amazon Prime.

As Amazon keeps on adding more and more services to its prime membership, it translates into rising membership subscriptions. Ultimately, it enhances the market share of Amazon and improves their profitability.

Amazon’s prime model may have been inspired by Costco but given the rigor with which Amazon executed it, it has definitely taken it several notches above than the originator himself.

Amazon prime was a leap of faith that Bezos took 16 years ago. There was passion but even higher was an uncertainty of whether this was ever going to work.

But as Bezos says, “It's not an experiment if you know it's going to work.”