Why Amazon Prime – yes, even Prime Day – wins at customer retention

Say what you will about Prime Day ‘ plenty of Twitter users already have ‘ but Amazon’s shopping holiday event thrown exclusively for its Prime customers marked a major milestone in retention marketing best practices. Namely: reward and incentivize your highest-value customers with exclusive events.

Amazon Prime, which launched in 2005, started off as a somewhat dubious concept: a pricey membership that included free, expedited shipping ‘ and nothing else. CEO Jeff Bezos introduced the idea despite feedback that the tactic was too expensive, both for customers who would balk at the $79 annual fee, and for Amazon itself, which would inevitably lose on shipping.

The naysayers weren’t wrong: Amazon loses an estimated $1 billion to $2 billion in shipping to Prime customers per year, a significant chunk of the $8.7 billion total reported in 2014 for shipping costs. However, Prime is now a major cornerstone of Amazon’s business model, and although the annual fee has gone up to $99, it hasn’t affected sign-up rates. Amazon reported a 53% increase in membership to Prime last year, and an estimated 30% of all eCommerce shoppers are members.

The Real ROI of Prime

In recent years, Amazon has made several upgrades to Prime membership in a clear move to add value. Free streaming for TV, music, and movies, a Kindle lending library, free one-day shipping, and now, dedicated sales events like Prime Day all contribute to a more appealing package, despite eating away at the company’s notoriously-thin profit margins. An Amazon spokesperson called Prime Day a calculated “business expense,” with analysts estimating a potential loss of $5 to $10for each heavily discounted item.

Sounds like a recipe for disaster, but Amazon has proved that it’s a deliberate investment. The ROI is in long-term customer loyalty and retention ‘ and the model is already working.

With Prime, Amazon has created a segment of customers easily identifiable as having high lifetime value. Prime members spend almost three times what non-Prime customers do per year, about $1,500 compared to $625. The added perks build customer loyalty, and for an increasing number of shoppers, Amazon owns mindshare when it comes to online purchasing. In a recent survey, 43% of participants reported searching for products on Amazon first, before any other search engines or eCommerce sites.

Prime Day: A Customer Rewards Event?

Prime Day itself was a mixed bag; after hyping it up as “more deals than Black Friday,” Amazon declared it a complete success amid customer complaints on disappointing offers. Amazon sales were up 80% in the US, but roughly half of all social media mentions were negative.

Despite this, Prime Day was a milestone event in that it was an event created primarily for existing customers. Although positioned as a summertime Black Friday, Prime Day was actually an exclusive rewards event with special discounts for high-value customers, just executed on a much larger scale. Prime has gone from a free shipping club to a loyalty rewards program ‘ albeit one that you pay for.

Because of the monetary commitment, however, Amazon has to be even more cautious when it comes to providing value. Even if the final sales numbers prove Prime Day was a success, the resulting customer backlash is serious cause for concern. Amazon must now be careful to listen to customer feedback and adjust accordingly, as loyalty programs that don’t provide enough value lose meaning. The expectation of a return on the customer’s investment to be included in the sale just worsens the sting.

What could have been a crowning moment for Amazon’s customer retention marketing efforts was somewhat dampened by the bad press that followed Prime Day. Still, it’s clear that Amazon is in it for the long haul when it comes to customer retention. Amazon Prime’s perks, including Prime Day, show Amazon’s commitment to winning ‘ and keeping ‘ their customers.

Plus, there’s always next year.