Bundling / Classes of Service / Economic Model

Bundling – Amazon Prime

In my previous post I wrote about exposing new revenue opportunities through unbundling. The case we looked at was Amazon.com and the opportunity for it to unbundle its free shipping service into order processing and shipping and sell faster order processing for a price.
Amazon.com is also a price innovator in many ways. It found success by bundling what used to be always sold as individual units – shipping service.

Amazon.com offers Prime, a shipping program that offers unlimited second day shipping for a cost of $79 a year. This plan, like Costco membership is considered to increase the sales, as customers enticed by the free second day shipping, shift more of their purchases to amazon and buy more often than they would normally.

How much revenue do these subscribers bring to amazon.com from their annual purchases to take advantage of free shipping? But we do not know how many subscribers are enrolled currently. amazon.com does not break out the number of subscribers to its $79 a year amazon.com Prime shipping program. amazon.com’s 10-K does not spell out the exact revenue from the Prime program, the revenues streams are combined together in a line item “Shipping Revenue”.

Here is an attempt to estimate the number of amazon.com Prime subscribers. The program was introduced in 2005. I computed the jump in shipping revenues year over year from 2002 to 2007. I cannot say much about the increase in revenue excluding Prime. The shipping revenue as a percentage of net sales is also decreasing, an indication of shift to Prime away from single unit shipping revenues. In the first year of introduction, the shipping revenue jumped by $91 million, in the previous year it jumped by $48 million. Since the uptake is bound to be lower in the first year, we can assume that the non-prime shipping revenue grew by the same $48 million in 2005 leaving $43 million to revenue from Prime.

Amazon Prime Revenue Model

Amazon Prime Revenue Model

In 2006 and 2007, if we assume the other shipping revenue remained the same, then we can attribute all the increase to Prime subscription growth. All this leads us to conclude that amazon.com has about 3.44 million Prime subscribers.

If we assume a $1000 revenue from each of them (based on shipping cost of 7.5% of total purchase), that is $3.44 billion just from these Prime subscribers. That is 25% of total sales.

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