The Attractive Economics of Amazon Prime Day
In just five years since its introduction, Amazon Prime Day has become one of the most anticipated sales extravaganzas on the retail calendar, finding its place among long-established shopping events like Labor Day and Black Friday.
Prime Day Over The Years
Amazon introduced Prime Day on the eve of its 20th birthday in 2015 with the goal of offering unmatched discounts to its loyal Prime members. The 24-hour event, spanning nine countries, was an immediate success as the company sold more items than it did during Black Friday 2014. Many sellers saw record-breaking unit sales and the Instant Pot, a multi-functioning pressure cooker, became an unlikely benchmark for the Prime Days to come after selling 24,000 units that day. Amazon’s own device line-up sold hundreds of thousands of devices, making Prime Day 2015 the largest device sales day ever.
In 2016, Amazon beat its own previous best as the second Prime Day eclipsed the first by more than 60%. More than two million toys and one million pairs of shoes were sold. The number of Instant Pots sold rose to a staggering 215,000 and Amazon devices including the Kindle e-reader and Fire TV set new sales records yet again.
Basking in the success from the previous years, Amazon extended its Prime Day 2017 to 30 hours boasting that “only Amazon could put 30 hours in a day.” And like clockwork, Amazon expanded to more countries, attracted more customers, and sold more products than ever before. The Instant Pot remained the top seller in the US, while Amazon’s Echo Dot speaker was the top-selling product world-wide.
In 2018, Amazon once again increased the duration of Prime Day from 30 to 36 hours. The company sold more than 100 million products. For reference, they sold 34 million products in 2015. The discounts also extended to Amazon-owned Whole Foods Market, allowing customers to reap benefits offline as well. Nearly 300,000 Instant Pots were sold that year, but the stars of the show were Amazon products yet again, as the Fire TV and Echo Dot shattered records worldwide.
In 2019, the number of countries doubled from its inaugural year and so did the number of hours. In the 48-hour period spanning 18 countries, Amazon sold nearly 175 million items, surpassing the previous year’s Black Friday and Cyber Monday sales, combined. Prime Day become more than just a shopping event as the company roped in music stars and streamed a music concert headlined by Taylor Swift. Despite these new developments, one thing remained constant, and you might have guessed it by now, Amazon devices, once again, had their biggest ever sales.
This year, the Prime Day was pushed from its regular spot in July to October owing to the Covid-19 pandemic. Analysts believe this was yet another record-setting year for Amazon. Sales this year were expected to grow significantly more than previous years despite the pandemic because of the upcoming holiday season and the overall shift to online shopping. Customers bought millions of Alexa compatible devices and the Echo Dot was once again the most popular item globally.
How Important is Prime Day to Amazon?
Over the years, Prime Day has grown exponentially, making it the single most important event for Amazon. But there are two components to Prime Day: the actual sales event and its after-effects.
The Prime Day Event
To understand the economics of the Prime Day event, we have to in turn understand the psychology of consumer behavior.
All major sales events like Black Friday, Cyber Monday, and Prime Day play on the same two tactics: make people believe they are getting something out of the sale and make them act fast.
By offering discounts, customers are made to feel like they’re getting free money by the means of savings. They also feel a sense of winning because they are getting something for less. “When you do score something, it feels great so you have this burst in dopamine, and people want that feeling again, and it causes a lot of shopping errors,” says Kit Yarrow, a professor of psychology and marketing at Golden Gate University. And by keeping the sales to a limited time period, customers are forced to act quickly or else lose a good deal. In contemporary slang, this is nothing but FOMO — fear of missing out.
Amazon exploits these two tactics as good as anyone can. Not only are products offered at unmatched discounts but the whole shopping experience is limited to 48-hours. The “Lightning Deals” page doubles down with a countdown clock and a widget showing how much of the deal has already been claimed, further persuading the customer to act with a sense of urgency.
The other incredible thing about sales is that shoppers often end up buying products that they would have otherwise not purchased. So while it appears as if the shopper is benefitting from lower prices, by buying more number of products, shoppers end up spending more money than they would have spent if they just bought what they needed outside of the sale period. “The euphoria of a good bargain is powerful and hard to ignore, even if you weren’t necessarily in the market for a new set of speakers in the first place,” writes Kimberly Truong, in an article aptly titled, “Why Do We Lose Our Chill On Amazon Prime Day?”
By leveraging all these aspects of consumer psychology and behavior, Prime Day has raked in billions of dollars for Amazon every year. The company does not release official sales figures, but analysts estimate that Amazon made $900,000 in 2015, $1.5 billion in 2016, $2.4 billion in 2017, $4.1 billion in 2018, and $6.9 billion in 2019 from Prime Day sales alone. This year, Amazon is expected to rake in close to $10 billion.
The After-Effects of Prime Day
But Prime Day is more than just the billions of dollars that flow in from the sale. In fact, the real pay-off only takes place after the event. There are two parts to this: prime memberships and Amazon’s ecosystem.
Unlike all the other shopping festivals, Prime Day’s deep discounts are not just available to everyone. It is only for Prime customers who, in the US, pay $119 annually for this membership, which gives them access to perks like special discounts, expedited shipping, and access to a huge trove of TV shows and movies on Prime Video. Owing to this exclusivity, during every Prime Day, Amazon sees a record-breaking number of new member sign-ups.
Prime members are likely to spend twice as much as non-Prime members. In 2018, while non-Prime members spent an average of $600 on Amazon, Prime members spent an average of $1400. This is partly because Prime customers are trying to get the most from their membership. Prime members are also more likely to start their search for a product on Amazon rather than on Google or elsewhere.
By funneling new members into the fold, Prime Day gives Amazon millions of new, loyal customers for life. The customers go on to not just make purchases on Amazon’s online store, but also at Whole Foods Supermarket and on the company’s vast media and e-book platforms. They also indirectly contribute to ad sales as more and more advertisers are enticed by Amazon’s status as the dominant e-commerce platform.
The second aftereffect of Prime Day closely relates to the first. Customers are not just tied into Amazon through the Prime membership but also through its product and services ecosystem. The one constant over the last five years of Prime Days has been the unconquerable dominance of Amazon’s own products. The Echo Dot has repeatedly been crowned the best selling product. Kindle, Fire Stick, and all other Alexa-enabled devices follow closely year after year.
How important could this be? Here’s a startling stat the Amazon released following its 2016 Prime Day sale that answers this question: “Prime members purchased an average of one Alexa-exclusive deal per second during Prime Day, using their voice.” In its analysis of Prime Day 2018, McKinsey further reported that “consumers who buy an Echo increase future spending at Amazon by ten percentage points compared with those who do not, and Amazon obtains an additional $15 in revenue per quarter for every customer who purchases a Kindle.” By selling more Amazon devices, the company is creating more channels for sales, further strengthening its dominance in the e-commerce space.
While much of the focus on Prime Day is on the event itself, the after-effects are what that separate Amazon’s Prime Day from all other holiday sales. That’s where the deep discounts and loss-making expedited shipping service begin to make sense. McKinsey estimates that “30 percent of the world’s gross economic output will be from companies that operate a network of interconnected businesses.” Amazon with its simple, yet effective, Prime Day business strategy, which latches customers onto the company’s vast ecosystem, is well-poised to be the frontrunner among these companies.