The Advantages of a Paid Subscription Program

Prime members spend more than twice as much money (an average of $1,500) at Amazon as non-members spend ($625)

Tom Caporaso
Tom Caporaso

Subscription commerce has helped companies drive greater customer loyalty long before milkmen and paper boys began making daily routes. In today’s Internet age, which offers consumers unprecedented access to products and services from outlets around the world, securing regular, repeat customers for your retail offerings is more important—and more difficult to do—than ever. As a result, the subscription business model is gaining an ever-larger following.

The proof is all around us. Last year, for example, venture capitalists contributed over $350 million in start-up funds to subscription businesses, including $220 million to Jet.com. The $350 million in investments was almost double the amount of funding that subscription companies raised in 2013. The 2014 figure doesn’t include the significant outlays of money, time, and resources that Walmart devoted to developing ShippingPass, the brick-and-mortar giant’s foray into subscription shopping as part of its growing focus on e-commerce.

Much of this heightened interest in building paid subscriber audiences is undoubtedly due to Amazon Prime’s success in that area. In December 2013, Amazon said that Prime already had “tens of millions of members worldwide.” A year later, the online retailer announced that over 10 million people around the world tried Prime just during the span of the 2014 holiday season. Amazon is notoriously secretive about exact Prime facts and figures, and any attempt to nail down its membership totals should be taken with a grain of salt. The most widely cited estimate, though, is that Prime had about 40 million subscribers in the U.S. and another 10 million or so overseas at the end of 2014.

By comparison, about 138 million people shop at Walmart stores every month, on average, but total U.S. online sales continue to rise steadily, even during periods when overall retail sales decrease. Moreover, when Prime members shop at Amazon.com, they’re incredibly likely to make a purchase. Per a recent Internet Retailer article on shopping conversion rates, i.e., the percentage of shopping visits that resulted in sales:

  • The average rate for shoppers at Internet Retailer Top 500 stores is 3.32 percent.
  • The average rate for non-Prime shoppers on the Amazon website is 13 percent.
  • The average conversion rate for Amazon Prime members on Amazon.com during the most recently measured time period was 74 percent.

The Prime conversion rate, which was up from its previous high of 63 percent, was 22 times higher than the average rate enjoyed by the IR Top 500. These rates are a direct result of the paid subscription model. As members of the program, Prime shoppers are assured of receiving free two-day shipping on their Amazon purchases. That certainty, combined with a desire to maximize their membership rewards (more on that below), means members are strongly predisposed to use Amazon whenever they shop—especially when they already know what they plan to buy.

A higher conversion rate is just one of the gains that retailers can realize from a well-designed subscription program. A look at Amazon Prime’s success offers additional insights into the benefits of such programs.

More Spending

Once people join Prime, they take full advantage of their ability to save on shipping. According to one analysis, Prime members spend more than twice as much money (an average of $1,500) at Amazon as non-members spend ($625). Indeed, most Amazon customers join the program to save on online shopping rather than to take advantage of Prime’s other benefits. In a recent survey, 55 percent of U.S. members cited free shipping as a very important factor in their decision to enroll.

Prime chose well in making free two-day shipping its main shopping benefit; online consumers consistently react positively to free shipping offers:

  • They’re two times more effective than percentage discounts in closing sales.
  • 88 percent of consumers in the U.S. say they’re more likely to shop online if deliveries are free.
  • 74 percent say that free shipping is the best way to improve their online shopping experiences, rating it higher than lower prices (50 percent) and same-day delivery (9 percent).

If you give your customers what they want, particularly (but not necessarily just) free shipping, they’ll reward you by spending more with you.

More Loyalty

Their spending habits indicate that Prime members shop at Amazon more frequently than non-members do. Just as critically, though, they’re also extraordinarily likely to embrace the Prime program, both after the trial period and down the road. Per recent estimates:

  • Prime trial members sign up for a full year 70 percent of the time.
  • Having joined, they renew their memberships after the first year 84 percent of the time.

This heightened loyalty is no doubt due, in part, to the program’s free two-day shipping benefit, as well as to Amazon’s willingness to keep adding Prime benefits. Yet, it’s also due to the very nature of loyalty programs. According to a 2013 survey of over 6,000 people:

  • The average consumer joined more than seven loyalty programs.
  • 57 percent say they changed when and where they shop so they can maximize their program rewards.

A fee-based subscription model can spur even greater loyalty among your members. People who pay to join your program are essentially investing in a business relationship with you. This skin in the game gives them particularly powerful incentives to shop with you whenever and wherever they can—not only to maximize their return on the investment, but also to reaffirm and/or justify the wisdom of their decision.

Greater Support for Your Corporate Goals

Amazon’s long-term goal is to turn itself into “The Everything Store,” and thereby, build an integral presence in as many aspects of consumers’ lives as it possibly can. Prime’s ability to draw shoppers into the fold makes it an essential part of the larger mission. Even though the current fee fails to cover even the annual costs of free two-day shipping, Amazon keeps expanding and funding Prime benefits, including original programming such as popular shows, movies and music, and more.

This expansion creates a bigger pool of potential program users; once new consumers join, Amazon has multiple, ongoing opportunities to market itself, and its various wares and services. It’s also consistent with Amazon’s current strategy, which is more focused on increasing cash flow than generating profits. It uses that growing revenue to keep its prices low, support Prime’s benefits, and expand its reach into new categories, product lines and services. This, in turn, drives more sales, more customers and more loyalty from those customers—which creates a self-sustaining cycle that helps to build more revenue over time.

Prime clearly contributes to that cycle. As noted, Prime members shop and spend more at Amazon than non-members do. Because they convert and renew their memberships at such high rates, they also create an entirely new revenue stream that significantly boosts Amazon’s bottom line before the member makes a single purchase. In fact, at the current $99 fee, the estimated 40 million Prime members may generate $3.96 billion in extra revenue for Amazon this year. (Even if you assume that as many as 25 percent of all members pay the $49 Prime Student fee, Amazon would still take in $3.46 billion.)

A subscription program can help you generate incremental revenue that can be applied to other needs and interests. It can also further more specific goals, both short and long term. The key to a sustainable, effective program is choosing benefits that reward customers for taking actions that serve your larger purpose.

Retailers large and small need to use every tool at their disposal to attract and retain customers, and grow their bottom lines. As Amazon Prime shows, a well-designed, fee-based subscription program offers a variety of benefits to retailers, including increased sales, more repeat purchases, greater customer loyalty and an additional revenue stream. In today’s e-commerce landscape, these advantages could provide just the edge your company needs to stay competitive.

Tom Caporaso is the CEO of Clarus Commerce, a provider of e-commerce and subscription commerce solutions.  Among its various properties, Clarus Commerce powers FreeShipping.com, the pioneer of the pre-paid shipping and cashback movement.  ClarusCommerce also customizes and manages programs, such as Return Saver, which it co-developed with FedEx, and 2-Day Shipping by MasterCard for clients across a wide range of industries.

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