The Price Wars

From the Reforge Alumni Weekly

Two of the biggest retailers in the U.S. -- and much of the world -- are now officially in a price war. 

Last week, Amazon launched a discounted Prime membership, allowing qualifying low income users to access the service for a $4.99 monthly fee instead of its standard $10.99. 

Around the same time, Walmart began tests of their "last mile" delivery program, whereby customers can opt for same-day delivery for a flat fee of around $7 to $10.

Today we'll take a look at what these and other moves by the two companies from a growth perspective.

Amazon's pricing, and new ways to pay

While a discount on Prime for qualifying low income users may not seem like a significant move in growth, the launch takes on more meaning when considered alongside Amazon's other recent rollouts.

Early in Q1, Amazon lowered its price minimums on free delivery for non-Prime members from $49 down to $35, effectively price-matching Walmart's free delivery minimums for its users.

A few weeks ago, Amazon dropped that threshold down to $25, further undercutting Walmart's shipping minimum, which remained at $35 (customers can also pick up in store for free, with no purchase minimum -- but that's kind of just like going shopping at Walmart).

And then there was Amazon Cash, launched in early April, which gave people without a credit or debit card a way to buy things on Amazon by depositing cash directly into their Amazon account via their local CVS outlet. 

Finally, the discounted Prime tier opens up the lower priced Prime membership for people with an Electronic Benefits Transfer number. EBT is commonly used for SNAP, TANF and other public assistance programs.

These launches indicate that, more than ever, Amazon has Walmart in its crosshairs, and is going after its core user base of lower income customers.

Delivering the "last mile" & becoming the bank

But, Walmart has been going after the low-income market segment since the company's inception, and has made its own moves to gain ground.

15% of households in major U.S. cities don't have checking or savings accounts, and another 24% do have accounts but also rely on payday loans and other services to get them through.

So, in 2005 Walmart filed an application to register to operate its own bank. After protests from bankers, competitors like grocers, and activists, it eventually dropped the campaign two years later... but didn't give up the effort.

Amazon Cash seems like a latecomer effort when compared to the financial services that Walmart has been quietly developing since it withdrew its application to become a bank.

Those services now include:

  • "Money Centers" where people can cash checks and pay bills
  • Wire transfer
  • The MoneyCard, a prepaid debit card fulfilled by American Express
  • GoBank checking accounts with no minimum balances and no overdraft fees (all you need is an ID and be over the age of 18) 

Walmart's offering to the low income and unbanked / underbanked segment of the population is part of a longer win-back campaign for customers they've lost to lower-cost retailers like Dollar Tree and T.J. Maxx. 

Related Lecture: Resurrecting Dormant Users

Meanwhile, Walmart is also working upmarket to chip away at Amazon -- and not just through its Jet.com acquisition. The company has been testing $7 to $10 same-day "last mile" delivery to customers who live near Walmart locations. The deliveries will be fulfilled by the company's own employees on their drive home from work. That's in addition to the company's direct stab at Prime through their 2-day free shipping with a $35 minimum purchase.

New audience acquisition, retention, and monetization

What does all this mean for Amazon's growth? 

At first glance, Amazon's move into offline channels through Cash, and their offering of incentives like discounted Prime and a lower free shipping threshold, seem to be acquisition plays for new audiences.

Related Lecture: Acquisition Channel Strategy

But, a look at Prime users' spending habits reveals that there's more going on. 

Getting a customer onto Prime increases their touch points with, and ideally their value from, Amazon to serve engagement and retention (we previously talked about Amazon's 1- and 2-year retention rates in the 90%+ range here).

Chart 1: US Amazon Prime Retention Rate (trailing twelve months)

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Even more importantly, it doubles per-user monetization. Amazon Prime members spend an average of about $1,100 a year with Amazon, not counting the membership fee. The non-Prime Amazon customers spend an average of $500-$600 a year. 

Related Lecture: Monetization

Since customers who qualify for EBT benefits can spend their SNAP or TANF assistance dollars on approved products anywhere that's convenient for them, Amazon's discounted Prime can potentially divert significant consumer spend that was otherwise going to Walmart, grocery stores and other places where people buy everyday goods.

Amazon Prime already reaches half of all households in the US, and the other half number within Amazon's regular 12-month active customer base.

For any retailer but especially an ecommerce like Amazon, retention and monetization go hand-in-hand. Getting more customers onto Prime, its primary retention and monetization driver, is a worthwhile effort, even if it's at a discount.


Other Growth Reads

What a VC Thinks of Blue Apron’s S-1 (interesting insights on its CAC and LTV) by Lee Hower

Peek Inside Intercom’s Multi-million Dollar SaaS Growth Strategy by Chris Von Wilpert

Leading Indicators: How we learned what to do today to prevent churn tomorrow by Guilherme Lopes

 

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