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Prime Members Are Getting More Value From Amazon Than Ever

Prime Members Are Getting More Value From Amazon Than Ever
07 May 2020

Prime members have had to wait longer for some Amazon (NASDAQ:AMZN) orders in recent weeks than they might be used to. The company’s one-day shipping promise has fallen by the wayside amid the coronavirus pandemic.

But that doesn’t mean Prime members aren’t getting value from their memberships. On the contrary, Amazon’s management says it’s seen a lot of pickup in members using all of the benefits that come with Prime, including unlimited shipping.

“We see our Prime customers are shopping more often, and they have larger basket sizes,” CFO Brian Olsavsky said on Amazon’s first-quarter earnings call. “We’re also seeing a lot more use of our video benefits and our digital benefits,” he added.

With Prime members seeing increased value from the program, we should see an increase in Prime subscription services revenue in the second quarter as Amazon attracts additional members and improves retention for existing members.

A look at the first quarter

Amazon saw subscription revenue grow 29% year over year last quarter after adjusting for changes in foreign exchange rates. That’s a slowdown from previous quarters, but that’s to be expected as Prime membership grows bigger and nears its saturation point in some of Amazon’s biggest markets.

It’s important to keep in mind that the U.S. — Amazon’s biggest market — was relatively slow to put stay-at-home orders in place. So, COVID-19-inspired consumer behavior only impacted a couple weeks of Amazon’s first-quarter results. Since Amazon accounts for Prime membership revenue equally over the life of the subscription, that means it saw minimal impact from new memberships, especially considering it offers a free trial.

That said, there were some clear impacts. Physical store sales increased 8% year over year as shoppers flocked to Whole Foods in late February and early March in order to stock up. (Olsavsky expects that growth to wane in the second quarter without as much hoarding behavior.) Online sales also accelerated in the first quarter, climbing 24% year over year.

If store sales are a leading indicator of Prime subscription revenue growth, Amazon should see strong growth in subscription services revenue in the second quarter.

Amazon’s Prime challenges

The two biggest challenges Amazon has faced in growing Prime subscriptions over the last couple of years are declining conversion rates from trial memberships and increased subscriber churn rates due to the monthly membership option.

Historically, Amazon has seen higher trial conversions and member retention from members who also engage with Prime Video and other digital benefits. To that end, Olsavsky pointed out that first-time Prime Video viewers doubled in March.

Olsavsky also said Prime Channels — additional OTT services Prime members can subscribe to — saw an uptick in subscriptions and viewership. As did digital downloads and rentals. Both should contribute to higher retention rates as well.

Is Amazon pulling Prime memberships forward?

While Amazon is seeing great engagement from its Prime members, and it’s likely seeing an uptick in new memberships, it may be merely pulling forward members that would’ve eventually signed up later in the year.

Netflix (NASDAQ:NFLX) management poignantly said the surge in subscribers it saw in the first quarter likely means slower subscriber growth later in the year. “The person who didn’t join Netflix during the entire confinement is not likely to join soon after the confinement,” management wrote in its letter to shareholders.

Amazon might have a slightly different experience than its fellow FAANG stock, though. The person signing up to gain access to Prime Now grocery delivery amid stay-at-home orders may be different than the person signing up for Prime later this year for exclusive access to holiday shopping deals and faster shipping.

Unfortunately, Amazon may not experience its typical mid-year surge in Prime membership signups, as it’s delaying Prime Day. So, while not every new Prime member Amazon is signing up these days may be a pull-forward from later in the year, Amazon may still see depressed signups compared to a year ago in the third quarter. Investors should instead look to see if Amazon is able to retain the subscribers signing up and stick with Prime today through the dog days of summer, even without Prime Day.

By Adam Levy

Source: The Motley Fool

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