How Amazon persuaded shoppers to pay up for shopping

NEW YORK -- Amazon clearly is entering its Prime.

That means, of course, its $100 annual membership program, now a decade old, which has accomplished the feat of convincing millions of people to pay an annual fee for the privilege of, well, shopping.

Prime is central to Amazon's strategy of dominating the world of commerce.

What started as a yearly fee for free two-day shipping now offers a sometimes bewildering array of perks, including household product subscriptions, one- and two-hour Prime Now delivery, streaming music and video, e-books, groceries (for an additional $200 a year), photo storage and more.

"Prime has become an all-you-can-eat, physical-digital hybrid," Amazon founder and CEO Jeff Bezos wrote in his annual shareholder letter in April. He wants the service to be such a good deal, you'd be "irresponsible" not to sign up, he wrote.

Why the emphasis on Prime? Simply put, members of the loyalty program shop more frequently and spend more money, analysts say.

Prime shoppers helped drive Amazon's surprise profit surge in the first quarter. Net income was $513 million, compared to a loss in the year-earlier quarter.

Amazon doesn't release detailed numbers on Prime, although Bezos wrote Prime has "tens of millions" of subscribers. Wedbush Securities analyst Michael Pachter estimates there are about 50 million Prime members.

Even a 25 percent price increase in 2014, the only one for Prime in 10 years, hasn't dampened enthusiasm for the program appreciably. Membership grew 51 percent last year, including 47 percent growth in the U.S., Bezos said.

Pachter estimated Prime members spend about four times what others do and account for about a third of all Amazon purchases.

"That's why Prime matters," he said.

Tawnie Knight in Tuscon, Arizona, joined Prime about two years ago for the convenience of free shipping. Since then, Amazon has become her default shopping site.

"I call it the $100 cart, because every time I go on there I spend about $100," she said. "Before Prime, I probably spend around the same amount, just with other retailers, like Wal-Mart."

Brandon Kraft joined Prime when it began 10 years ago to get cheap textbooks while in school. Now he finds it essential -- with five kids ranging in age from 17 months to 6 years -- for ordering diapers, wipes and other household goods.

"I think it's fair to say we spend $125 or $150 a month at Amazon that we wouldn't have been spending if we didn't have Prime," Kraft said. "We go to the Amazon site first when we need something, and if they don't carry, it we start the actual shopping process of looking elsewhere."

Of course, Amazon Prime isn't for everyone. Those that shop infrequently online won't find the $100-a-year fee worth it. With an estimated 244 million registered Amazon accounts, a large majority of Amazon shoppers -- roughly 80 percent, in fact -- haven't signed up yet.

Amazon continues to add Prime offerings to entice more users. Amazon recently started offering a monthly Prime subscription for $11 a month, aimed at hooking shoppers during the holidays, when the majority of Prime members sign up. In 2015, 3 million shoppers joined Prime in the third week of December alone.

Amazon also introduced a standalone video service for $9 a month, setting itself up to compete directly with other streaming services such as Netflix.

Investors long have griped about Amazon's strategy of investing the revenue it makes into new offerings, leading to little or no earnings growth.

But the first-quarter results were the fourth in a row in which Amazon reported a profit, which some analysts interpret as a willingness to rein in costs when needed.

Chief financial officer Brian Olavsky, however, told reporters on a conference call the company's profits stem mostly from strong growth in sales. The company isn't slowing its investments, he said, citing recent spending on logistics and original programming for its streaming video service.