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In 2005, Amazon launched Prime video-on-demand service as a new product extension. This is an unrelated product to its core business of e-commerce. In this blog, let us understand Amazon’s strategy of connecting video streaming services to the e-commerce business. Video streaming is an entertainment business whereas e-commerce is pure online retail.
Entertainment is not related to online selling. So, Why did Amazon launch a prime video streaming service?
Let’s dig deeper into the benefits of Amazon prime at INR 999/year. There are three benefits offered to prime subscribers:
- Online streaming service
- Free same-day delivery or two-day delivery
- Early access to Billion-day sale for prime members
The key consumer behaviour that Amazon looked at launching this streaming service is the shift of consumers to watching videos compared to reading online. In 2005, Google also launched youtube. The consumer behaviour began to shift from searching on google to searching on youtube. Consumers prefer watching videos vs reading content. The success of Netflix, The Viral Fever in India are testimonies to the shift of consumer behaviour from reading to watching videos. Amazon launched a prime service looking at consumer behaviour and was perfectly aligned with customer habits.
Another benefit that Amazon prime gets is understanding the customer preferences based on the movies and content that users watch online. This leads to a better understanding of users preferences. Amazon uses this data to sell more to its users. As Jeff Bezos puts it: “The no.1 thing that has made us successful by far is obsessive-compulsive focus on the customer”
Now, Let’s understand the second benefit of Amazon prime – free & speedy delivery. This benefit offered by Amazon connects its video streaming service to its core e-commerce business. Amazon connected streaming with e-commerce.
This is an innovative market penetration strategy to sell more to its existing customers. When offered fast and free delivery, consumers buy more. Prime members shop 2.5 times more than non-prime members on Amazon. Almost, 36% of Amazon’s annual revenue of $74billion comes from prime members.
So, Amazon bundled its benefits of the e-commerce business(free delivery and early access to sale days) to a video streaming service. This bundling of offering multiple benefits looks very lucrative to its customers and Amazon has a 12% market share and is No.2 in the video-on-demand business next to Netflix. Amazon Prime as a product extension has a heavy impact to increase the volume of sales on Amazon.com.
A product extension like Prime is successful in its video-on-demand business and also contributes to the growth strategy of the e-commerce business.
Now Let’s understand the fitment of Amazon Prime into its portfolio. There are two factors to consider:
- Consistency with existing business: Amazon has two advantages of consistency in terms of creating prime video service
- Amazon has the strong infrastructure power of AWS and technology talent that is used to build prime video-on-demand service. So, the cost of building this product is low and hence Amazon has a price advantage to offer prime service at a low price of INR 999/year and compete with Netflix which is a premium service offered at INR 6000/year.
- Amazon is offering prime service to the same customer segment and is easy to sell the new service to the same customer rather than creating a new customer. It costs 6 times more to create a new customer than to work with the same customer.
- Constraints or limitations to create a new product (in terms of capabilities or competencies): Creating videos or content is not a core competency of Amazon. Amazon had to acquire other companies or hire people to create cool content that is loved by its users.
So, Does Amazon Prime fit into its product portfolio?
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