Changing the Relationship - When Retail and Service Models Collide
Amazon CEO Jeff Bezos finally came clean on Amazon Prime numbers in a recent letter to shareholders and the numbers were staggering ...
100 million Prime subscribers worldwide and over 5 billion items shipped. What's more Amazon's own version of Black Friday broke the sales record for the e-commerce giant.
It's clear that what started as a premium delivery proposition has evolved into so much more with services like Prime Video and Prime Music now core to the relationship Amazon has with its subscribers. This continued innovation around the proposition has led to phenomenal growth with CIRP estimating a doubling in Prime numbers between 2015 and 2017 (see below)
This growth is not simply a US phenomenon - we can't get enough of Amazon in the UK either. It was announced this week that Amazon is searching for two additional distribution hubs in the UK to add to the 4 million sq ft that it acquired in 2017. According to Savills, this space is the equivalent of 63 football pitches.
The beauty of Prime it seems is that it works for both parties. For Amazon, it provides three key benefits. Firstly, Prime customers inevitably end up spending more - recent estimates suggest Prime members spend nearly double compared to their 'pay as you shop' counterparts. Secondly, it provides a guaranteed revenue stream against which to offset capital investments.
However, this isn't a one way street. For consumers they get the additional benefits and convenience of a 'one stop shop' but also the additional value/ utility of buying a bundle of services from one provider.
In the world of retail, this is a relatively new model but in many ways this formula is long tried and tested in other more Capex intense markets. The world of telecoms has wrestled with this for many years. Whilst pay as you go tariffs fuelled the rapid take up of both mobile and internet services in the early years, they were a difficult business model against which to set investment. Our demand for bandwidth has risen inexorably and investment has had to increase to keep pace - the latest estimates from the GSMA suggest that 5G will require mobile operators to invest 16-17% of revenues in Capex to keep up.
As a result, the model has shifted. Operators have pushed longer contract periods to offset increasing network costs and rising handset subsidies and consumers have looked for more added value in their bundles as a result. The latest data in OfCom's CMA report, clearly demonstrate this trend:-
However, beyond this financial underpinning, it's also worth considering the psychological factors which make this such an attractive model. Loss aversion means that, as consumers, we are far more loathe to give up what we have than be attracted to something new. Putting to one side contract periods, we are still more likely to want to carry on with something once we have it rather than when we have to re-appraise our decision through a period of ongoing renewal or re-purchase.
Much has been written about Amazon Dash - the magic buttons which we'll dot around our home to re-order household items at a single push.
However, as Tom Goodwin has noted that simplicity is key in this space (https://www.linkedin.com/pulse/what-real-disruptive-innovation-simplicity-tom-goodwin/) - if delivered well, it's the simplicity of these subscription models that make our life easier as consumers. No surprise then that these models are springing up in all sorts of categories - from Dollar Shave Club to Smol, previously FMCG categories are finding themselves disrupted by subscription models.
Retail of course has always seen itself differently but it's no surprise that a variety of subscription models are popping up here too. From Prime Wardrobe and Trunk Club to stylist services such as The Chapar and Enclothed, there are more and more subscription models entering the fray.
On the one hand this represents an opportunity for retailers - guaranteed revenue to offset rising rates and the fixed costs of physical space. However, the risk is the relationship becomes ever more distant with the shopper. Now, more than ever, it's critical that stores stand apart from the friction-less experience of the subscription model. Where subscriptions are invisible and seamless, stores still have the opportunity to be interactive and immersive; to engage with shoppers in a way which subscription models simply cannot do. Being caught between two stools is simply not an option...