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The Wall Street Journal reports on how is investing in its Amazon Prime loyalty program, adding services such as movie and television program streaming and e-book lending, without raising the price from the $79 a year that it started charging when the program began in 2005.

According to the story, “Prime is so crucial to the Seattle-based company that it is willing to lose hundreds of millions of dollars a year on the program, by some analysts' estimates. Until this year, Prime offered only quick shipping for $79 a year. But the online retailer has added services to Prime while keeping the price unchanged as a means of keeping customers loyal to Amazon's more-profitable operations.”

One analyst tells the Journal that it is “estimated that Amazon spends more than $90 a year for each Prime customer, losing $11 annually for each subscriber. Of the $90, $55 comes from shipping costs and $35 comes from acquiring digital video content. The book-lending service raises those costs higher still.” And, analysts tell the paper, “Amazon can offset those losses because of its highly profitable businesses, such as getting fees from other merchants who sell through Amazon's website and by selling computing power and storage to other companies.”

While Amazon does not comment on estimates, one analyst tells the Journal that Prime has had a palpable impact on business - the typical customers who spent the $79 to get “free” two-day shipping are estimated to have tripled their spending on Amazon to $1500 a year. And, it is suggested that “up to 40% of Amazon's domestic revenue, which totaled $18.7 billion in 2010, comes from Prime members.”
KC's View:
I’ve long been preaching the gospel of Amazon Prime in this space, arguing that in many ways it fuels the world’s best and most effective loyalty marketing program. And it certainly has been interesting to watch over recent months as Amazon adds services to Prime without raising costs, even as other companies (Netflix, Redbox) raise their prices.

Stock analysts tell the Journal that they are not thrilled that Amazon is willing to lose so much money with Prime, but the evidence over the last decade and more suggests that Jeff Bezos knows what he is doing - he’s playing a long game here, and he knows the ultimate opponent is Walmart. And so he knows he needs to focus on catering to his best customers, and building a list of best customers that may be unrivaled in retailing.

In the long run, Amazon’s stock price will take care of itself. Amazon needs to spend its time taking care of its customers, which is exactly what it is doing.