The Segmentation Temptation: how narrow vision underestimates Amazon

The Segmentation Temptation: how narrow vision underestimates Amazon

When I first read about this “leaked” information

Reuters article by Jeffrey Dastin

about Amazon’s Prime Video originals and how they convert people to being

Amazon Prime (at AmazonSmile: benefit a non-profit of your choice by shopping*)

members, I noticed right away how shows based on books tended to be towards the top of the list in terms of efficiency (except for The Grand Tour, which was at the very top of the list).

I also noticed that coverage of this alleged internal document didn’t mention that the sales of those books had increased considerably in conjunction with the shows.

That didn’t surprise me too much. Although Amazon started as a bookstore, it’s rarely covered that way any more. It’s seen much more as a tech company, and many tech writers just aren’t that into the book business (at least, they don’t write about it much).

As a former brick-and-mortar bookstore manager, and a long-time techie (going back to the punchcard days), it seems to me that many reporters and writers tend to analyze things in isolation.

I understand that. It makes sense to write about what you know best, topics where you have the expertise and context to provide significant insight to your readers.

However, there is a tendency to then extend what you see in one area to Amazon as a whole…like the old parable about the blind people and the elephant, each person coming to a different conclusion about what an elephant is like based on what part they encounter.

The graph Reuters shows looks at the cost of ten Prime Originals versus people who stream that show first when they sign up for Prime.

The implication is this:

Let’s say a show cost $1,000,000 to produce and initially market. If 10,000 people joined Prime (which costs $99 a year usually) because of that show (which is suggested by them watching it first), that’s pretty close to break even. If only 5,000 people joined Prime, the show was too expensive. If 20,000 joined Prime, it was a good investment.

While I have no doubt that Amazon takes that figure into account as part of its calculations, I’m equally certain that it is just one small part of the puzzle. A doctor doesn’t just listen to your chest and ignore your purple leg or high cholesterol. They are all parts of the puzzle.

Let’s start out with the obvious.

Prime tends to be “sticky”. What that means is that most people who sign up for Prime stay with Prime. Not everybody every time, but most people most of the time. If the 5,000 people I mentioned above pay for Prime twice (they renew for a second year), that then equals the 10,000 paying once.

That is only one small thing.

I mentioned those books…for example,

The Man in the High Castle (at AmazonSmile: benefit a non-profit of your choice by shopping*)

is currently #2,129 paid in the USA Kindle store. That’s for a book with only 3.5 stars out of 5 as an average of 2,628 customer reviews at time of writing. The book was first published in 1962…approximately 56 years ago. That’s a remarkably good performance when there are more than six million titles in the Kindle store.

Amazon probably doesn’t make much directly on the sale of that book (especially for the e-book). E-book sales are relatively low cost (especially compared with p-books…physical/paper books), but they aren’t entirely cost free. The current list price for the Kindle edition is $9.99**. Let’s say Amazon makes $3 per sale. 10,000 “copies” (licenses) is probably enough to get it to this level. That’s $30,000…a drop in the bucket for a million dollar expenditure. Double it, triple it…it’s noticeable, but still not a big percentage.

If people buying those books, then go on to buy Philip K. Dick’s other books…let’s see, what’s $30,000 times a gazillion? 😉

It could even be that someone who never read science fiction/alternative history before gets into it because they watched The Man in the High Castle and then read the book…but let’s just cut to the quick on this one: the books aren’t enough to pay for producing the series.

That’s certainly going to be true with Amazon’s new Tolkien series, which is going to be quite expensive.

No, the big thing is that people who become Prime members spend more money on higher profit margin physical items…what I call “diapers and windshield wipers”.

It’s not about that $99 they spend in a year on the membership, it’s about all those other things they buy.

It’s a reason why it’s hard for people to compete with Amazon. It’s not even just the retail part…a lot of Amazon’s business now is services and what I call the “Infrastructure of the Internet”, especially web services. Amazon doesn’t need to make money on any given thing they do…okay, yes, they didn’t make a profit at all for years, but they are now. 😉 It’s about the population of sales, not the individual sale.

When I managed the bookstore, we sold TV Guide. At that time, it costs us more money to sell than we made on it. It was quite inexpensive, and by the time you calculate the labor costs and the rent cost, we lost money.

Why sell it?

Some people came in every week to buy it, and from time to time, they bought something else. At the holidays, we were one of the places they shopped for gifts. Those “inspired sales” were what made it worthwhile to lose money on the TV Guide.

That’s also why Amazon can do something that irritates some people. 🙂 If you please more people than you irritate, or if you irritate people but they still shop with you, it’s worth losing a few sales.

Very few people are like My Significant and me. Years ago, we had a bad customer service experience at a very famous department store. Even though we had regularly shopped at that chain before, we never did again. There are people who stop using Amazon, but I would guess they are few and far between.

Amazon customers tend to be loyal, or at least, that’s my guess. I think that’s especially true of Kindleers, and that’s a good thing. If people who use Kindles also become Prime Members (which I would also expect), Kindles could lose money on a per unit basis, and it could be worth it to Amazon to keep those loyal customers.

I will say, Prime Video is not what keeps us Prime members. We use Prime every week…I listen to Prime Music a lot, and we take advantage of the Prime shipping. Out of Netflix, Hulu, and Prime Video, the one I use the least is Prime Video.

There are two main reasons for that.

The first one is discovery. I just find it hard to, well, find things. We watch on a Fire TV, and it’s far easier for me to find things to watch on Netflix or Hulu…or even YouTube (using the Firefox app). I’m not quite sure what it is, but it just doesn’t surface shows that appeal to me.

The other one is probably not an issue for most of you, but it may increasingly become so in the future: there’s no Prime Video “experience” for Virtual Reality.

I watch Netflix and Hulu in what I call VAM (Virtual/Augments/Mixed/Merged) space quite often…I watch it at lunch while I do my “floor work” (which helps with my chronic condition, for one thing). It looks and sounds (even just on ear buds) much better than a TV across the room.

That’s the “killer app” for VAM space for me for now…I do other things, but I’m really hoping Amazon gets on board this year! I don’t know when I’m going to see the second half of the first season of the new version of The Tick without it…

Now you know…if you ever wonder how Amazon can afford to do something, know that it’s because it helps them make money on something else at some time over the course of the future. 🙂

What do you think? Do you use Prime Video? Is it the reason you have Prime? If not, what is the reason? Is there anything you would like Prime to include which it doesn’t? On a side note, I was talking to some people who said they’d lost quite a bit of affection for Amazon post-Whole Foods; my impression is that they also loved Whole Foods and felt that the experience there had deteriorated because of Amazon…has that happened for you? Feel free to tell me and my readers what you think by commenting on this post.

You can be part of my next book, Because of the Kindle!

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* I am linking to the same thing at the regular Amazon site, and at AmazonSmile. When you shop at AmazonSmile, half a percent of your purchase price on eligible items goes to a non-profit you choose. It will feel just like shopping at Amazon: you’ll be using your same account. The one thing for you that is different is that you pick a non-profit the first time you go (which you can change whenever you want)…and the good feeling you’ll get. :) Shop ’til you help! :) 

** It’s also available as part of Kindle Unlimited (at AmazonSmile: benefit a non-profit of your choice by shopping*) at no additional cost to members, but that’s another whole story

This post by Bufo Calvin originally appeared in the I Love My Kindle blog. To support this or other blogs/organizations, buy  Amazon Gift Cards from a link on the site, then use those to buy your items. There will be no cost to you, and a benefit to them.


4 Responses to “The Segmentation Temptation: how narrow vision underestimates Amazon”

  1. Edward Boyhan Says:

    I’ve been thinking about what Prime services I use in response to your post. I’ve been a Prime member since 2009, but I didn’t really start to use Amazon in volume for anything other than books and kindles until 2011. I originally got Prime for free as part of a deal for my first Kindle (a KDX), but didn’t start to take advantage of Prime in any meaningful way until 2011 — and then it was for the free 2-day shipping (I don’t think there were any other advantages to Prime back then).

    Over the years I’ve gotten to the point where almost all my non-grocery shopping starts on Amazon. Not so much because of low prices or the free shipping, but rather the incredible depth and breadth of product selection, the availability of sizes larger than what you can find in Brick & Mortar Stores, and most importantly the vastly reduced search time offered by Amazon over other shopping venues.

    When searching for a product on Amazon, I am sometimes flooded with choices. By filtering on Prime-eligible products I can reduce the choices. Amazon (and Prime) may not always offer the lowest prices, but they are always near the bottom, and the time it would take to find the absolute best deal just isn’t worth it. I can use my time better in other pursuits than shopping.

    So beyond the basics, I do use Prime video (sparingly on my Fire HD 10), Prime Music (extensively with all my Alexa devices. Amazon Music Unlimited (ditto). As I’ve stated before I have no interest in Kindle Unlimited, or any of the other Books-oriented services (KOLL, Kindle First, etc.) — I’m a buyer, not a borrower :roll:.

    • Edward Boyhan Says:

      So, in the last day or two, I’ve started to use another Prime benefit: unlimited photo storage on Amazon Drive. I decided I wanted to show a selection of my photos on my Echo Show, and also on my TV via Amazon Fire TV. I had hesitated to do this because my Pictures folder on OneDrive is over a gigabyte. After learning of the unlimited photo storage for Prime members, I figured out how to transfer a selection (about 400 MB) of photos to Amazon Drive. Then it’s just: “Alexa, display my photos”, and up they come. They look surprisingly good — in light of how many reviewers have claimed that the Echo Show display is nothing to write home about.

    • Bufo Calvin Says:

      Thanks for writing, Edward!

      That’s interesting, and I see some parallels. Definitely, the Kindle was a “gateway device” for Prime. We use the free shipping a lot. I also listen to Prime Music at work most days, don’t do much in Prime Video (but I might if they had a VR “experience”).

      I think another really important part of why I shop with Amazon is the 1-click thing of them already having all my financial information. I’m comfortable that Amazon has it; I’m reluctant to give it to new people, even brick-and-mortar stores I don’t know. Another key thing (and these are both Amazon, not just Prime) is the ability to reorder. I often end up going into my orders and reordering something…and I wouldn’t know what brand and so on it was without that.

  2. Tom Semple Says:

    Prime is and has always been mostly about free shipping for us. Prime Video is probably #2 on the list of other reasons. Prime Music and Prime Books are almost non-factors in terms of Prime benefits. When we got our first Echo we used Prime Music a lot but moved on to Spotify and now Apple Music.

    I never enjoyed going to Whole Foods (high prices, not convenient for picking up a few items, and ironically they don’t seem to have as many brand choices as much smaller stores) but as more locations have opened up, Amazon has cut prices, and Prime card cash back benefit may bring me in more. Amazon Locker might be useful as well, though I haven’t checked to see which stores have this. I wouldn’t know if the experience has degraded since Amazon’s acquisition as I’ve never been a regular customer.

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