In 2005, Amazon CEO Jeff Bezos told the New York Times that its newly released Prime membership program was among the company’s consumer-focused innovations “that wonʼt pay off for years.”
In many ways, Bezos was right. Amazon Prime, introduced in February 2005, was a $79 annual membership program (which now costs $139 per year) that offered shoppers unlimited, express two-day shipping. Amazon took its time to get the service off the ground. As Amazon expanded beyond shipping to include services like Prime Video, the Prime membership program gained significant momentum with consumers. And, 20 years later, Amazon Prime is a household name and generates at least $40 billion in revenue.
Amazon identified a white space within logistics at a time when shipping costs were a significant barrier to early e-commerce adoption. And despite rivals underestimating Amazonʼs impact, competitors have struggled to adapt to the new world order set by Amazon in e-commerce. The last publicly disclosed number for total Prime members stands at more than 200 million.
Working backwards: In 2005, Bezos wrote in a letter to shareholders, “the prime ingredient in these decisions is judgment.” In February that year, Prime dropped amid a healthy dose of skepticism.
“Most people thought [Amazon was] crazy and stupid,” Scot Wingo, founder of ChannelAdvisor, an early Amazon partner for its marketplace, told Retail Brew. Traditional retailers wanted to educate consumers about high shipping costs rather than absorb them as Amazon did.
Conventional thinking among industry insiders was “they’ve got an unlimited liability” on their hands, Wingo said, adding “All these people were thinking, including third-party sellers, ‘This is crazy. They’re going to lose so much money doing this.’”
When we asked Amazon about the rationale behind this massive bet, Lisa Leung, director of member growth for Amazon Prime, wrote in an email that the decision to go all in on shipping came from the Amazon shoppers. “We always work backwards from what members want,” Leung said.
“What are the pain points of shopping online? Is it having the selection you want, having it arrive quickly, and not having to pay extra for delivery? Thatʼs what drove us to launch Prime 20 years ago with an innovative and simple promise: 1 million items, delivered in two days, for free,” Leung added.
Wingo said he remembers Primeʼs launch a bit differently: “I think Bezos pushed this through.” Bezos was betting on this key metric often used in consumer marketing: lifetime value of a customer. “[Bezos] basically got to that very quickly, and he understood the lifetime value of a customer is extremely important,” Wingo said. “He realized free shipping was the unlock for [lifetime value].”
Leung said the buzz in the industry was that offering free two-day delivery “would bankrupt Amazon.”
“However, what we heard from Amazon customers was that it solved a huge pain point with online shopping,” she added. “We knew that if customers loved it, we were doing the right thing.”
However, Amazon did identify the shipping part correctly. “What Amazon got right was that shipping was stopping people from adopting e-commerce,” Wingo said. “By being the people that broke that, they gained this huge share of e-commerce by basically making shipping to be perceived to be free—not only free, but fast.”
Over the years, Prime ended up building a captive audience. “It really created a set of rabid fans of Amazon, and it created lockdown,” Wingo said. “So, once you were in Amazon Prime…it was your go-to place to buy anything. And then it became very hard for people to fight that, but no one really saw it coming.”
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In a letter to shareholders in 2016, Bezos acknowledged, “No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it.” Still, in 2016, Macyʼs then-CEO Terry Lundgren dismissed Amazonʼs impact, instead focusing on significant challenges Amazon would have to contend with managing its volume of online returns.
In April 2018, Amazon finally disclosed its first ever Prime membership count at 100 million.
How Prime ate the retail world: One of the key drivers of Primeʼs success has been FBA, or Fulfillment by Amazon, launched in quick succession a year after Prime. FBA filled a sort of middle ground for Amazon where it was able to ship goods from third-party sellers at faster speeds to build stickiness into the consumer experience, Wingo noted.
Leung said with the FBA launch, Amazon recognized that customers love having access to more products that Amazon could get delivered quickly: “FBA could offer our selling partners a simple solution to an often cumbersome process.”
Prime began to take off in a big way with FBA because Amazon could store and ship a wider selection of products besides books and games or top-selling items. For the industry, though, this was a “trough of disillusionment,” Wingo said. “Retailers thought it was the dumbest idea ever and it wouldnʼt work. And Amazon, cleverly, didnʼt tell people it was working. But you could see their retail sales started to really shoot [up].”
In Q1 of 2010, Amazonʼs revenue rose from $4.89 billion to $7.13 billion, hinting that sales of items other than books had taken off in the marketplace. After that, there was no looking back for Amazon, and the retail industry began to recognize its impact.
The first people to get alarmed about it were shipping companies, Wingo said, because they could see Amazon was going to cut them out. “We would have meetings with shipping companies and they were like, ‘We had all this volume coming through Amazon, and now itʼs slowed down. Why?ʼ And we knew that they had started doing some direct deliveries. We couldnʼt talk about it then,” Wingo recalled.
From making direct deliveries to now offering Prime members the fastest delivery speeds, Amazon has taken strides to steer clear of rivals. “While [Prime] will always be known for fast, free delivery on a vast selection, we will continue to evolve Prime benefits for members—from entertainment to healthcare, grocery to music, and so much more,” Leung said.
According to Wingo, in a world where getting products quickly to consumers matters, Amazon is so far ahead of everyone now that it feels like an insurmountable lead.
“Amazon Prime is far from its peak,” Leung wrote. “We feel like we’re just getting started.”
Amazonʼs decisive investment in Prime ultimately vindicated Bezosʼs long-term strategy, according to Wingoʼs analysis.
“It was the craziest, boldest move that you could imagine and it didnʼt make sense, but it paid off,” he said. “I put it up there with Facebook buying Instagram, Google buying YouTube. And I know itʼs not an acquisition, but as far as risky big bets go, Amazon betting on Amazon Prime is huge.”
This is one of the stories of our Quarter Century Project, which highlights the various ways industry has changed over the last 25 years. Check back each month for new pieces in this series and explore our timeline featuring the ongoing series.
