Is Amazon Prime Driving Unrealistic Customer Expectations?

Speed and low prices are driving recent eccomerce retail strategies – but is Amazon setting them up for failure in the future with their Amazon Prime program?

When Amazon announced it’s 2-day flat fee shipping service in 2005, Amazon Prime, a shift in industry expectations was felt by consumers and competitors alike. The service embodies Supply Chain 4.0 as it enables faster, more flexible, and more efficient shipping for customers2.Ecommerce customer decision making processes are shortened as Prime is able to deliver just in time products to their door.

In the midst of this exciting advance, one must stop to think – how does Prime impact customer’s future expectations of shipping and delivery times? Can this already sophisticated supply chain system continue to evolve to meet consumer expectations over time? What will consumer expectations look like 10 years from now? These are all questions that I urge Amazon to consider in their quest to own ecommerce.

Shipping has consistently been a key differentiator within the customer decision making process online. A survey from Morgan Stanley shows that nearly 80% of consumers would buy more online if e-commerce firms offered free shipping. It also stated that consumers value free shipping and delivery above all other e-commerce service offerings3.

Amazon’s service focuses on both price and speed, but as the retailer continues to attract new customers to the service – you have to wonder if they will be able to meet customer satisfaction? Since it’s launch in 2005, the company has increased prices twice, raising the original $79 annually fee to $99. CIRP estimates that 45% of Amazon customers in the U.S. are Prime members but churn continues to be an issue4.

What enables Prime’s strong supply chain network is economies of scale. In the free-shipping game, big shippers, who get more favorable rates from package carriers like FedEx Corp. and United Parcel Service Inc. because of guaranteed and predictable volume, have a big competitive advantage. Amazon often get volume-driven discounts of 70% or more on certain shipments, in comparison to smaller retailer’s to 5%. Amazon is among the handful of top customers who pay the Postal Service an average of $1.87 a package to make the last leg of a residential delivery. Other retailers must pay for a package’s full journey5.

Currently – only a portion of the items being sold on Amazon are eligible for the Prime service. This in comparison with the 45% of the company’s sale represented by Amazon Prime translates into an imbalance of customer’s expectations and the degree to which Amazon can meet customer demand. To meet this demand, Amazon will need to consider new ways to scale their prime program4.

The automation process is also something I encourage Amazon to consider as it would allow them to capture more vendors in the Prime program. This includes digital performance-management systems, clean-sheet models for warehousing, transport, or inventory set targets automatically. Eventually, we will see performance-management systems that “learn” to automatically identify risks or exceptions, and that change supply-chain variables to mitigate harm. The resulting continuous-improvement cycle will push the supply chains closer to its efficient frontier2.

A more Innovative distribution concept, such as drone delivery, could allow companies to manage the last mile more efficiently for single-piece and high-value, dense packages—fulfilling customers’ customization needs while delivering their orders even faster than is possible today with mass-market, standard products2..

Exhibit 1 more clearly displays how increased automation can improve the supply chain process in the future1.

In the medium to long term, I also see cause for Amazon to scale its warehouse programs so that penetration points in certain areas are deeper. This will enable Prime to better meet customer demand of eligible product which I consider to be a must for this organization to achieve long-term success in their quest to own the ecommerce channel.

The questions I would like to ask my classmates relate to their own consumer preferences and taste, as well as how they view the future of ecommerce:

My first question is – have you personally seen a shift in your customer behavior since faster shipping programs have been introduced online and have you developed a notable preference because of this shift?

Secondly – how do you see this translating to your consumer behavior in the future (ie are your expectations going to surpass 2-day shipping at a flat rate)? If so – are you waiting for companies to set this standard or do you already have your own expectations in mind?

 

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  1. PwC Strategy&. 2016. “Industry 4.0: How Digitization Makes The Supply Chain More Efficient, Agile, And Customer-Focused.”

 

  1. McKinsey&Company 2017. “Supply Chain 4.0 in consumer goods”.

 

  1. Seitz, Patrick. “Online Shoppers Rank Free Shipping As Most Important”. Investor’s Business Daily; Los Angeles[Los Angeles]28 July 2015.

 

  1. Seitz, Patrick. “Amazon Prime Churn High, but new membership growth higer”. Investor’s Business Daily; Los Angeles[Los Angeles]13 Feb 2014..

 

  1. Stevens, Laura. “’Free’ Shipping Crowds Out Small Retailers; Businesses scramble to keep up with e-commerce merchants that enjoy big discounts from carriers”Wall Street Journal (Online); New York, N.Y.[New York, N.Y]28 Apr 2016: n/a.

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12 thoughts on “Is Amazon Prime Driving Unrealistic Customer Expectations?

  1. Great article, Kimberly! I absolutely agree with you that it is critical for Amazon’s long term success to more strongly consider the benefits (and risks / shortcomings) of automation. After some on our section mates attended the fieldtrip to connect with Richard Cohen, the CEO of C&S wholesale grocers, and shared what they learned, I automatically thought that Amazon could benefit from these consequences of automation. For instance, while one of the more obvious cost savings of warehouse automation is a decrease in manual labor costs, another critical cost saving component is with automation, there is no need for electricity (since robots don’t need light to operate).

    To answer your question, I have noticed that because of faster shipping program, my consumption has steadily increased. However, I am not a Amazon Prime member yet I still receive my packages fairly quickly. This may be part of the reason why Amazon is experiencing churn with their prime customers: why pay $99 a year when Amazon is generally know for great customer service regardless of whether the customer is a Prime member or not. Now that Amazon has set this stand, I will generally not shop at a retailer that does not provide the same customer service.
    https://books.google.com/books?hl=en&lr=&id=bDw7DwAAQBAJ&oi=fnd&pg=PP1&dq=warehouse+automation+savings&ots=zU4MADSLiH&sig=tSWwQEvgzAzl-nYxuBVCV4Rnd60#v=snippet&q=electricity&f=false

  2. Thanks for this, Kimberly! I definitely agree – within the last couple of years, I have become an extremely demanding customer when it comes to shipping. My expectation for speed has certainly increased, but even more than speedy delivery, I expect it to be free, and to get free returns on top of that. You are definitely right to call out the implications of these rising expectations for companies’ operations and profitability, but I do also imagine that the implications are different – and potentially worse – for some categories more than others. For instance, as I’ve moved more of my apparel spend online, I find myself ordering multiple items to “try on” at home knowing full well I’ll likely return many of them…but this then puts a double shipping burden on the company I’m purchasing from (versus many categories of purchases that I’ll rarely, if ever, return). I imagine that as Amazon pushes selectively into different categories (e.g., I know they’re making a big push on apparel), they’ll have to consider these types of differential shipping / return rates as well as impact on profitability at a category level.

  3. Kimberly, you bring up a lot of interesting points in your piece. Relating to my own consumer behavior I have definitely focused many of my online purchases where I know I will get free/fast shipping. Whether I shop at Amazon or other ecommerce companies I prioritize my purchases on shipping.

    I wanted to touch on your point around innovation in Amazon’s last mile distribution. As you mentioned, technologies like drones and improving warehouse technologies could help Amazon become more efficient. I believe solving the last mile problem will be a key driver of Amazon’s success. It is interesting that Amazon is also innovating on last mile through its acquistion/distribution strategy. In its recent purchase of Whole Foods (see article link below), some speculate that Amazon can now leverage the 430 Whole Foods stores as new distribution, storage and pick up points. It seems that Amazon is well aware of the opportunity and challenge presented by its supply chain and is attacking it from many angles.

    https://www.wsj.com/articles/amazons-deal-for-whole-foods-seen-as-ideal-for-urban-pickup-and-delivery-hubs-1497700800

  4. Thank for your article Kimberly! I agree that by setting the 2-day delivery standard at a flat fee Amazon set high expectations for itself and for competitors. At the same time, I think Amazon is doing a good job in creating complimentary delivery models and educating consumers about them. For example, with Amazon Prime Now and Amazon Fresh, the company is offering shorter delivery times, while at the same time charging a higher rate. In addition, for low value-add product, Amazon is offering the option to deliver the items for free as an add-on to other deliveries, thus bundling items for delivery and decreasing their overall shipping costs. Those are interesting alternatives to educate the consumers about the trade-offs in delivery logistics and break the expectation that all deliveries should be both free and fast.

  5. I certainly have seen my consumer preferences change over time as Amazon Prime and free, fast shipping have become more the norm. As one of the previous commenters mentioned, this has primarily been in the form of increased consumption. “Free shipping if you spend $50” is a pretty easy mark to hit, but has probably increased a large percentage of ticket sizes that would’ve otherwise been smaller for non-Prime users such as myself.

    To answer your second question, I’d also like to know how behavior will shift. So much has changed in the last couple of years alone that it’ll be interesting to see if the next changes will be large or only incremental. I think there will be some rebellion against the shipping methods meant to provide further convenience (but also infringing on personal space), such as physically leaving goods in your house.

  6. Great post, Kim. I am fascinated by the ways in which Amazon is shifting consumer behavior and global cultural norms. When I think about frustrations I have had with Amazon orders, it almost always boils down to issues with the shipper (i.e. UPS, USPS, FedEx). I wonder how Amazon will utilize technology to eliminate those issues (not just drones, but driverless cars, greater transparency into shipment arrival time/carrier so that you don’t arrive home to the dreaded “last delivery attempt” note tapped to your door, etc.). Per your first question, I have definitely sen a shift in my own behavior. Because I expect to be able to receive packages in a day or two, I will wait to place orders until the last minute (thus often limiting my options to Amazon Prime ONLY and further reinforcing the behavior).

  7. Thanks Kim for the post. Amazon certainly has many competitive advantages over other online retailers. Supply chain efficiency is certainly one of many. With the scale of Amazon, which enables it to dominate the market on eCommerce in the US, it has build warehouses and transportation depots all over the US. Having such mass eventually drives down cost because Amazon controls all the delivery process. I think a low shipping cost is part of Amazon’s value proposition and part of the shopping experience. I don’t worry too much that Amazon will take this away from the consumers. However, I do agree that this dominance served Amazon to achieve its almost monopoly position which, in the long term, may not be good for consumers.

  8. Kim – Definitely appreciate this. To your point, it’s difficult to break the self-fulfilling/ re-inforcing cycle of increasing customer expectations + increasing operational efficiencies to decrease time from online order -> receipt. In fact, like EL mentioned in a comment above, Amazon’s acquisitions of Whole Foods will likely exacerbate the cycle.

    Wonder if one solution to alleviating this cycle is to integrate the digital purchase with physical shopping experience? For example, rather than exclusively rely on shipping – could Amazon bundle a customer’s online order with her/ his in-store purchases at a Whole Foods? In this world, Amazon would need to tie together a user profile btwn Amazon and Whole Foods, and re-make its Whole Foods stores into mini-distribution centers. Yet, it could alleviate some of the self-fulfilling cycle that you describe.

  9. This is an interesting post Kimberley and I have asked similar questions from a different point of view in my article. With its disruptive innovations in supply chain, Amazon is not just pursuing the consumer needs but evolving and shaping them. The idea of convenience has moved from ‘delivery to my home’ to ‘immediate delivery at no fee’ for consumers. This can easily be seen from the increasing market for same delivery in the US [1].

    My concern with this evolution of consumer demand is that Amazon’s promise might not be financially sustainable for the company. Studying your recommendations, whether it is investing in warehouses and deeper penetration, or building innovative models such as drone delivery, the capital investments in development and operational expenses will either have to be passed down to consumers (as higher shipping rates) or absorbed by the company (leading to lower profitability).
    The threats? We saw in the Fasten vs Uber case that a disruptive entrant can steal market share from the incumbent and take advantage of the market development cost that the incumbent has incurred. Even though Amazon is a behemoth, it cannot discount threats by disruptive ecommerce models promising customers same day delivery (specially in low value items such as grocery) by connecting local retailers with consumers. For example, in India, few hyperlocal delivery startups such as Grofers, Peppertap emerged and their business model relied on building an ecommerce platform for connecting (or transporting goods from) nearby retail stores with consumers, without owning any inventory or investing in warehouses. Their biggest advantage was the existing consumer education about using ecommerce with respect to apps, payments and existing consumer demand for same day delivery.
    Amazon is certainly defining and driving consumer expectations but at what cost (to itself and consumers), is an important question to consider.

    Graph and Data source:

    1. https://www.statista.com/statistics/272496/us-same-day-delivery-order-value-shipping-fees/

  10. Hi Kimberly –

    Thank you for writing this article and for asking us to consider our consumer habits and how Amazon Prime is affecting our purchasing and decision making. Personally, I have been an Amazon Prime customer since almost the very beginning. Until about the last two years or so I have been extremely happy with the service. Up until that point, I was still surprised and delighted that I could receive just about anything that I could imagine from Amazon Prime in exactly two days – no more, no less. However, in the last few years as Amazon has been experimenting with same day and one day delivery, it seems as though their standards have slipped. It is now becoming a 50/50 chance that I actually get my items within two days. In your post, you talk about adding more vendors to the prime program and adding new technologies like drones. I am hoping that while Amazon focuses on expanding, that they make sure they aren’t leaving their former core competencies behind.

  11. Great job Kim! A good look at the implications of Amazon’s stranglehold on ecommerce and the impacts of shipping on their supply chain and the market’s expectations. I personally have seen a shift in my buying habits since quick (1-2 day) shipping has become standard practice. I used to go to the store when I needed something because a lot of times 3-5 business days is too long. Amazon changed the game by offering pretty much everything you could need with free shipping. I agree that the implications could be long lasting for ecommerce, because now consumers demand it. I know that whenever I shop elsewhere and have to pay for shipping or the shipping is slow, I’m much less likely to shop there again and Amazon’s death grip on my wallet gets a little bit tighter.

  12. Very interesting post Kim. I view Amazon more of a supply chain and logistics behemoth than a retailer. In fact, I believe their supply chain and ability to achieve 2 day delivery to most US locations is a compelling benefit in itself for suppliers to pay for the service. Furthermore, as they continue to invest in their supply chain operations I can see a near future in which they challenge UPS and FedEx as the largest 3PL company in the industry. A large concern I have is how their competition will be able to compete with them without the massive volume that a marketplace provides and the cost efficiency that said volume enables. I for one have absolutely changed my consumer habits since amazon and will not be going back.

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