Amazon Prime Targeting The Poor

(Michael Seto/Business Insider)
Amazon CEO Jeff Bezos.

Amazon Prime’s new monthly pricing tier is aimed at attracting lower-income customers, according to Macquarie Research’s Ben Schachter, even though it’s more expensive than the original annual Prime plan.

In a note published on Monday, Schachter wrote that the majority of Prime users so far have come from the upper-income US household market — $55,000 or more — who were willing to pay the $99 upfront annual fee for access to free two-day delivery and a bunch of video and music content.

But the new $10.99-a-month plan, which would cost $131.88 for the whole year, gives the freedom to commit to the service on a month-to-month basis, potentially making it a more attractive option to people who found the $99 upfront annual fee too costly.

Amazon launched two new plans on Sunday, including the $10.99 plan that’s basically the same Prime service available on a month-to-month basis, and an $8.99-a-month plan that gives access only to Amazon’s streaming-video service.

“We view the full launch of a monthly option as Amazon pushing to attract new lower-income Prime members,” Schachter wrote. “It could prove more attractive for those who cannot afford (or want) a $99 up-front membership or don’t want to commit for a full year.”

Schachter added that Amazon will continue to experiment with new initiatives to pursue lower-income households. For example, it recently offered a 20% discount on new video games to all Prime users. These are all part of Amazon’s plan to get Prime to 50% of US households by 2020, he said.

“Given that we think Amazon Prime is likely somewhat saturated for above-average-income households in the U.S., we think that Amazon will continue to experiment with ways to attract more lower-than-average-income households over the next few years,” he wrote.

Amazon’s concentration on the higher-income market for Prime has often been pointed out by other analysts as well. In a note published last week, Piper Jaffray noted that Prime’s penetration is highest and growing fastest among upper-income households, with more than $112,000 a year in annual income.

They drove 40% of Prime’s growth over the past three years, and now more than 70% of households in that demographic have a Prime subscription.

Amazon doesn’t disclose the exact number of its Prime members, but it did say that it grew 51% last year and has “tens of millions” of users.

Source: Business Insider

Kudos to Amazon.com for this move to tap into the low income segment.

Okay with that said, I’m kind of confused, or I think I’m understanding the difference between the mindsets of the upper class apart from low income consumers.

How do low income consumers consider a month-to-month option “cheaper”? You have an upfront one-time annual fee of $99, or pay an annual total of $131.88 from the month-to-month option? That’s a premium of almost $33?

The low income segment can’t spare $33 bucks?

May be they can in shopping terms, but can’t in emotional terms. However upfront costs intimidate them. So they’re willing to pay extra for the convenience of paying a month-to-month fee for the same service.

It makes sense, Rent-A-Center has done it successfully with the lower income crowd. Give them the product at no cost upfront, and charge them exuberant fees per week/month. No one called for their heads–yet.

Now I’m seeing the psychology behind it now. Extra kudos Amazon 😉

The low income consumer is WILLING to pay premium for the same product, just spread that cost across the timeline.

And now I see why the upper income segment has (and keep) more money. Because it’s like ‘why not just pay it now in full and enjoy the benefits by getting 20% back, times how many times I purchase a product?’

In other words, you’re looking at the quality (upper income) versus quantity (lower income) of the product.

You pay $11 bucks per month, PLUS the price of the product. Then subtract the 20 percent. BUT, depending on what they buy, there’s a good chance that the monthly fee beat the whole purpose of saving 20 percent in the first place because the monthly fee ate up the 20 percent. So I figure invest the $99 upfront so I can milk the 20 percent the whole year of all it’s worth. In other words; 20 percent times 100 purchases is a total of 2,000 percent. Or am I missing something in my math?

In other words; math would be my friend if I chose the $99 option. And it takes thinking to figure that out.

Could that be what separates the upper income consumers from the rest? Just wondering.

What’s your thoughts?

 

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