A Massive Catalyst for AMZN Stock?
There are many catalysts behind Amazon.com, Inc. (NASDAQ:AMZN) stock’s recent rally, such as cloud computing, on-demand video streaming, and its plan to build a global logistics platform. But there is one factor that’s less talked about that could provide a strong safety net for the soaring Amazon stock—brand loyalty.
On most occasions, the term “brand loyalty” is associated with companies that make physical products. For instance, customers of certain smartphone makers would not switch to another brand even if it offered better value. Another example is a famous American motorcycle manufacturer, whose customers tattoo the company’s name on their bodies.
So, how does brand loyalty have anything to do with an e-commerce company?
Well, as it turns out, Amazon has built a somewhat unique group of customers over the years—Prime members.
Basically, an annual “Amazon Prime” membership gives you free unlimited two-day shipping on millions of items sold through its platform. If you live in certain metro areas, you can even get free same-day delivery. At the same time, Prime members get access to Amazon’s on-demand video streaming service and several other perks. With a membership fee of $99.00 a year, its value is hard to beat.
Here’s a number that shows just how loyal Amazon Prime members are: 96%.
That’s the amount of second-year paid subscribers who decided to renew their membership for a third year, according to a report from Consumer Intelligence Research Partners (CIRP). (Source: “Amazon Prime Members Stay Members,” Consumer Intelligence Research Partners, June 1, 2016.)
New subscribers are quite loyal as well. The study suggested that 91% of first-year paid subscribers renew for a second year. The renewal rates for both first- and second-year paid members showed improvements over time.
Note that even those who went for the free trial have a decent chance of becoming a paid member. The study estimated that 73% of 30-day trial subscribers eventually become paid full-year members.
“Once Amazon Prime members renew for a second year, Amazon appears to have attracted them for the long haul,” said Josh Lowitz, partner and co-founder of CIRP. “After a second year, renewal rates are over 95%, and have improved gradually in the past two years.” (Source: Ibid.)
Considering how many Prime members the company already has, the renewal rate could mean a lot to Amazon stock.
Amazon does not break out the number of Prime subscribers specifically. However, back in December 2013, the company said that it had “tens of millions of members worldwide” at the time. (Source: “Record-Setting Holiday Season for Amazon Prime,” Amazon.com, Inc., December 25, 2013.)
A more recent estimate suggested that Amazon Prime membership in the U.S. reached 54 million at the beginning of this year. That’s nearly half of the number of all U.S. households! (Source: “Amazon Prime Now Reaches Nearly Half of U.S. Households,” CNN Money, January 26, 2016.)
This has several implications for Amazon stock.
Firstly, with such an enormous subscriber base, Amazon could be making more than $5.0 billion a year just from membership fees.
Secondly, after taking into account the high renewal rates of Prime members, you’d see that the $5.0 billion of revenue could be recurring. And if the company can add enough subscribers to offset those who do not renew, the amount could grow even more.
But collecting membership fees is just the start. The real reason why Prime is a huge catalyst for Amazon stock is this: Prime members spend a lot more on Amazon. Last year, a CIRP study showed that in the U.S., Prime members spent on average $1,500 per year, more than double the $625.00 spent per year by non-Prime users. (Source: “Amazon Prime Hits New Highs,” Consumer Intelligence Research Partners, January 27, 2015.)
The Bottom Line on AMZN Stock
Prime members have strong incentive to stick with Amazon’s e-commerce platform. The reason is simple: when you want to buy something online, you can either get it on Amazon with free two-day shipping or purchase it elsewhere, which seldom offers that convenience. At the same time, the selection of items available to Prime members has also been expanding.
What this means is that it’s very hard to take Prime members—the biggest spenders—away from Amazon. In other words, the company has very wide economic moats. And that’s a good thing to know for Amazon stock investors.