Amazon Prime and the perception of value

A fascinating TIME Business look at the runaway success of Amazon Prime contains a fascinating insight about the perception of value and how it affects behavior…

Amazon Prime is the higher-level subscription membership available to customers.  It’s sort of like Netflix, with lots of video content available for download, at a cost of about $80 a year.  Amazon loves to get customers hooked on it by offering free and discounted trials.

In addition to the streaming content, Amazon Prime includes a nice perk for shoppers: free two-day shipping on every Amazon purchase.  Normally the free shipping option at Amazon is a bit slower (although I’ve still found it excellent, frequently performing well ahead of delivery estimates) and you’ve got to build up $25 worth of purchases to qualify for it. 

Customers like this shipping benefit a lot, leading to a surge in Prime memberships far, far beyond any original projection – it was supposed to take two years for Prime to break even after launch, but they did it in three months – but it also changes the behavior of shoppers, in a way that makes Amazon executives very happy.  They start buying a lot more stuff at Amazon, and shopping far less at any other online or brick-and-mortar retailer.  “A Prime member now makes $1,224 in Amazon purchases each year, on average, compared with $505 for non-Prime customers,” reports TIME.  “After factoring in costs incurred for shipping and streaming, the average Prime member yields Amazon $78 more in profits than other customers.”

The prevailing theory as to why Amazon Prime produces so much more loyal shopping activity, and the reason why Amazon probably won’t drastically reduce the price of Prime membership to deliver a knockout blow to its competition, is what makes this story so intriguing:

From the get-go, many Prime members have been motivated to spend more at Amazon not just because prices were good and shipping was free, but because they want to get their money’s worth out of their $79. If a customer is not ordering all that much, the subscription fee isn’t worth paying. If Prime fees go away, the compulsion to “get your money back” goes away too. When something is free, consumers tend to think it’s not particularly valuable.

An experiment on a massive scale that demonstrates the perception of value dramatically alters behavior!  “Free” benefits are treated as less valuable by the recipients.  That has some interesting ramifications for social policy, don’t you think?