If I asked you to give me an example of a hugely successful loyalty program, would you mention Amazon Prime?
After all it doesn’t have the trappings of a stereotypical loyalty program — no points, no tiers, no rewards for transactional frequency or spend.
Yet you should be in no doubt that it was intended to drive loyalty from it’s inception. Vijay Ravindran (former Amazon director of ordering) was at the original kick-off meeting for Prime in the autumn of 2004 and recalled the conversation with Jeff Bezos:
The thing I remember very distinctly is this phrase: “I want to draw a moat around our best customers. We’re not going to take our best customers for granted.”. He said something along the lines of: I’m going to change the psychology of people not looking at the pennies differences between buying on Amazon versus buying somewhere else. And I think that completely changed the mentality. It was brilliant. It made Amazon the default.*
It seems to be doing a job for them too — according to The Future Shopper Report, Amazon Prime members:
- are twice as likely to start their searches on Amazon as those who don't have the service (85% vs 42%)
- spend more with Amazon. 1 in 4 Prime members direct more than half of their online spend to Amazon. For non-members, it is 12%
- believe it’s good value for money (65% of them in fact).
Whilst we need to be careful around these numbers because of self-selection (the customers most likely to join Prime are those already most engaged with Amazon), Amazon is a company built on testing and experimentation. They spend millions of dollars on Superbowl TV spots promoting Prime and it’s plastered all over their delivery trucks, packaging and more. Given that I would wager Amazon know Prime is doing the job for which it was designed.
Why does Prime work so well?
You can (and I have) distil why Prime works into three elements that combine to make it successful:
To use an economic term, friction costs. In his book “Inside the Nudge Unit”, David Halpern wrote:
Just as a real weight pushed across a real table will soon grind to a halt as a result of friction, a human impulse to do something soon grinds to a halt when it becomes a hassle.
Amazon have taken this to heart and made it super-easy to order and get your products when and where you want them. Set up your defaults, press a button and you’re away.
The list of benefits Prime members receive is long and, crucially, priced well. We know people see pricing though a relative lense. To quote Dan Ariely from his book ‘Predictably Irrational’:
…humans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly.
If you look at Prime Video on its own, it stacks up next to Netflix from a cost perspective and that’s before everything else thrown in on top.
The variety and depth of benefits also ensure that there are at least a couple of things that interest most people rather than relying on one thing.
The final element is the importance of the cost of the program, whether an annual fee upfront or monthly payment. It is crucial because it plays into the psychology of sunk costs.
People react irrationally in relation to sunk costs. Fans who paid £100 for a concert ticket will drive into a blizzard to get there when fans who got tickets free would think better of it.
This irrationality is driven by loss aversion. Paying £100 for a ticket and not attending feels like losing £100 even though the money has been spent and there’s nothing you can do to get it back. Similarly the more you use something that you have paid for the better you feel about the purchase.
As a result, paying £79 for Prime contributes to customers choosing Amazon over the competition. They want to get value out of that investment or they see it as wasted money.
The bottom line
Amazon identified the idea of engendering a form of loyalty as a business benefit and came at the problem in a really interesting way. They created a hugely valuable proposition for which they could then justify a price which mentally locked in customers.
As with most things Amazon, other retailers have jumped on the bandwagon:
- At GAME the Elite program was launched and has had a really positive impact
- lululemon has been testing a paid-for program since 2018
- CVS in the US launched Carepass that offers free pharmacy delivery and around the clock healthcare access.
If you can tick the boxes shown in this article regarding maybe a paid program could be valuable for you in ensuring customers at least start their purchase journey with you rather than your competitor.