Source: Amazon
Amazon shifts to a subscription model for Prime Pantry
Amazon’s Prime Pantry service is shifting to a $5 monthly subscription model from the $6 it currently charges per box.
Prime Pantry, launched in 2014, offers “low-priced, every-day essentials in everyday sizes.” Items include non-perishable goods such as detergent, paper towels, canned foods, breakfast foods, beverages and beauty and personal care items.
The programs selling points include offering savings without the need to buy in bulk and eliminating the need to visit stores for regularly-purchased items. Products arrive in one to four days. The Prime Pantry’s micro-website states, “Skip the trip to the grocery store and let us do the heavy lifting.”
Under the current set-up, users pay a flat fee of $5.99 to receive up to 45 pounds of selected items (the equivalent inside a four cubic feet box), encouraging consumers to squeeze as many items as possible into a box.
Under the updated formula, Amazon’s Prime Pantry service will cost $5 a month for unlimited orders, according to reports. Users must commit to order items amounting to at least $40 each month to earn free shipping.
Amazon will roll out the new monthly subscription service gradually. Shoppers will able to opt out of the service and pay $8 per box for shipping.
Bloomberg noted that Amazon’s fulfillment expenses — covering storing, packing and shipping — grew 43 percent in 2017, outpacing revenue growth of 31 percent, and noted that the viability of shipping bulky, heavy household items has long been questioned.
“Grocery has been a real challenge for them,” Sucharita Kodali, at Forrester Research, told Bloomberg. “They’ve not found a model that works yet. Raising the price won’t get you more customers. It gets you more revenue from a core group of loyal customers.”
The move comes as Amazon has been fine-tuning its Prime reach, including rolling out a special program last year aimed at those receiving government assistance and recently offering discounts to Medicaid recipients.
In January, Amazon raised the monthly Prime membership rate from $10.99 per month to $12.99, and its monthly cost to students to $6.49 from $5.49. The annual Prime fee was kept at $99.
Discussion Questions
DISCUSSION QUESTIONS: Does it make sense for Amazon to shift Prime Pantry to a subscription model? Does the move make Amazon any more or less of a competitive threat in the household essentials category?
Poll
BrainTrust
Mohamed Amer, PhD
Independent Board Member, Investor and Startup Advisor
Ryan Mathews
Founder, CEO, Black Monk Consulting
Subscription services are the current rage, so Amazon’s move makes sense in that regard. Also, consumers tend to forget small subscription fees rather than delivery charges, which they see on every bill — another reason to switch. Amazon has been having trouble perfecting its grocery offerings. This effort to fine tune will make the company even more competitive with traditional grocers.
It’s a smart move and locks Amazon further into the household buying cycles. Subscriptions are all the rage because they work. There’s benefit to the consumer of ease and reliability and a benefit to the retailer of reliable revenue and customers.
I’m just guessing here, but this seems like a logical extension of the Prime logic. In other words, once the flat fee for shipping for the month (or year) is paid, the “shipping cost” barrier to ordering is removed. Consumers have a way of translating sunk costs as “it’s paid for — let’s use it!” Customers then feel much more flexibility to order that $2.99 item on Prime instead of going to Lowe’s, and they should feel that same flexibility with ordering household items. The $40 threshold shouldn’t be much of a barrier in this case either. Of course, more orders per month does increase Amazon’s gross dollar outlay for shipping per customer so I’m not quite sure how that math will work.
This is all dependent on the numbers. For those households that shop these items frequently, this is a better deal. For occasional shoppers, it doesn’t work. Consumers have to pick the model that works for them.
Amazon is getting shoppers used to counting on the monthly box of non-perishables. Once they get that idea embedded they can add a perishables subscription box. And so on …
Anytime you can offer a subscription model it is good for both the consumer and the retailer. First, it’s very convenient for the consumer. Once you know how much you consume in a month, it’s easier to just have it show up without thinking about it. For the retailer, it’s a predictable stream of income. Amazon makes it easy — and at a very reasonable cost.
Amazon’s shift to a subscription model for Prime Pantry is a much simpler approach for both Amazon and their customers.
For Amazon it will be easier to predict demand and future revenue as well as better management of their supply chain and costs. Customers also benefit, rather than attempting to “optimize” cube, the flat fee and unlimited orders model is easier to understand and it encourages greater use of the subscription service. This move is very likely to increase the competitive threat across categories.
The keys to efficient delivery are proximity, frequency and quantity. Amazon needs to increase the frequency of orders. A flat monthly fee just might do that. The challenge with heavy consumables is quantity. With a low flat fee, there needs to be an order minimum if there’s ever a hope of breaking even on delivery. Nothing is “free,” even for Amazon. Amazon has been shrewd in being early and being able to subsidize the future based on other revenue streams. They must solve subscriptions as one of the paths to growth. There’s one sure bet, the current pricing is just another one of the iterations as Amazon innovates on multiple paths to your pantry.
Subscriptions are a big move that sort out the occasional purchases for recurring customers. Consumers are getting more sensitive to recurring monthly charges as they realize how much of their paycheck is spent before they get it. Will subscriptions make them buy more? I think not, despite it being a loyalty bonus. How far off will increases to the subscription fee be?
Subscription services are clearly on fire these days and building momentum. However, ultimately evolving and fine-tuning the subscription model to be more “prescriptive” in nature is critical for Amazon and Prime Pantry to grow into something substantial.
After the initial euphoria and adrenaline rush of joining a subscription service model, the key for companies to sustaining this momentum is to not “subscribe,” but rather “prescribe” valued-added services, products and experiences that the customers are seeking. There is no limit to the amount of data out there, yet in order to provide an engaging experience it is truly the data insights that will drive a long-term subscription relationship between the brand and customer.
Subscriptions are a great way of locking in loyalty for retailers. So yes, it is a smart move. Yes, this also means Amazon is working hard at locking in more of the consumers’ attention, loyalty and dollars. This should be deeply disconcerting to all retailers — grocery and non-grocery. Fortunately we are seeing more subscription models from other smart retailers — like Sephora and Ulta — outside of grocery.
Of course it does. As I have said repeatedly, Amazon’s business model is to surround the consumer with programs and devices that make shopping an unconscious activity. There will be plenty of time to raise prices once there is a large enough base of installed consumers. By moving from incenting weight to incenting frequency and dollar volume Amazon is making Prime Pantry much, much more attractive to the average consumer. By extension, the move makes Amazon a far more competitive player in the household essentials space. After all, who gets excited about going to the store to buy things like laundry soap? (Quick answer: nobody!)
I’m confused by this on many levels — and suspect many consumers and Amazon shoppers will share my confusion.
First, is this a clever way to say “we’ve taken staples out of Prime” so you’ll have to be BOTH a Prime customer and a Prime Pantry customer? I know my wife was quite angered at Amazon when they removed the one regular purchase she made at Amazon from Prime.
Second, this doesn’t seem to be a subscription. Rather, it’s a payment for shipping and handling — one far too low to ever cover costs even when mixed with margins.
No, this doesn’t make sense. And I think it reflects more of Amazon’s struggles to find a way to profit on retail sales than anything.
Retailers should be very cautious and NOT pursue any attempts to compete with this model at the moment.
This makes it easier and more convenient for the shopper. That is good.
But more important and considerably more valuable is the mindset of the consumer. “I will go to Amazon Pantry first.” And they will never leave.
The choice of Amazon Prime and Prime Pantry has always been confusing to me and this only makes it more confusing. In the case that the item I want to buy is on Prime Pantry and I have to fill a whole box, or if I have to purchase a certain dollar amount and that is the only item that shows up on Prime Pantry, I have chosen to not purchase in the past. Why should I buy more than I want or things I don’t want to use the service? I have not found the value in this service.
The subscription model suits for convenience, not for savings, from what I can see. That said, people are happy to pay for convenience so I think it will be able to find and keep its niche audience.
Another thing to note: there are limitations around brand selection with this service. I imagine that for most typical grocery items brand loyalty is low, but some might find the limited choice unappealing.
Great move on Amazon’s part. It takes mental energy to optimize the box contents to ensure one is getting good value from the shipping fee. Though let’s be real, Amazon was certainly taking a hit on a meager $5.99 shipping fee for a four cubic foot, 45 pound box.
With a subscription service, consumers will be more likely to place orders more frequently so they can make the most out of the subscription.
Amazon already has a successful subscription model across many services now, not all of which you’d immediately liken to online shopping. Counting my own individual Amazon subscriptions:
I’m already spending over $70/month to access various services that I now feel I can’t live without. Adding another $5/month to avoid a trip to a big box store or similar makes sense to me as a consumer, and is in keeping with their other subscription services.
This is an interesting move for Amazon. Let’s face it — Amazon doesn’t make systemic changes like this without probable cause based on intense data analytics of past purchases. If they shift Prime Pantry to a monthly all-you-can-eat model, then they must have data that lets them compare the current per box pricing scenario to the monthly subscription scenario based on how many subs they believe they’ll acquire. The numbers must have shown them more people will sign up than the number of repeat boxes per customer within a month in the old pricing model. This is just sound business tactics being applied to a data model. Not to mention they must be predicting that this will allow them to recoup more of their shipping costs for grocery items that seemingly continues to elude them.
It is definitely a smart move as I imagine they looked at abandon carts when customers would calculate in the delivery charge and decided they need to change. I don’t see this lasting long as a standalone extra $5 on top of a Prime membership, and foresee them rolling it into an upgraded Prime offering that they will roll out with more features.