Amazon Prime
Every retail company operates on the premise that the more volume they sell, the better the net results will be. That’s how they’re able to work with wafer-thin margins yet turn a profit each quarter. But Amazon.com, Inc. (NASDAQ:AMZN) has been going about it in a slightly different way.
Although Amazon Prime is essentially a loyalty program, it is by no means a static one like most other programs offered by retailers. Amazon’s strategy here is to offer as many services as possible to its members and is adding to that list at a rapid pace.
What started out as free two-day shipping has now bloated to a host of services and benefits ranging from unlimited photo storage to special discounts to streaming music and video, free restaurant delivery and dozens of other features.
The $99-a-year product’s value keeps increasing as Amazon keeps adding more and more layers to it. As the value of the membership increases in the eyes of the customers, it improves the stickiness of the product, while also inducing the customer to order more from the retail giant. That’s already been proven to work, as you can see from the chart below:
Not only is the Prime user base growing at a rapid pace – according to estimates there are 63 million Prime members in the United States as of June 2016 – but they also outspend non-prime members by a wide margin.
The Two-Pronged Strategy for Sustainable Growth
As AWS takes care of the bottom line, freeing up cash for reinvestment in the retail segment, Amazon will be emboldened to add more services to its Prime membership program. As they add more services, it attracts more people to join the program. As more people join the program they will order more from Amazon, increasing the volume of goods Amazon moves. As the volume increases, Amazon’s cash flow increases, and the whole cycle repeats itself. The strategy is as good as it gets and, unfortunately for other retailers, this is not going to be something that they will be able to stop that easily.
Most of this growth component may already be factored into Amazon.com, Inc. (NASDAQ:AMZN)’s stock price, but as long as this self-feeding growth strategy continues, there will be an upside to Amazon stock for several years to come. As such, adding large quantities of AMZN stock might not be the best way to go about investing in such a company. An alternative method would be to use a blend of dollar-cost averaging and buying on dips. This way, you have a disciplined strategy in place that also takes advantage of news shockers, and you’ll be able to keep your cost basis as low as possible while adding to your position over time. Do this religiously for the next few years and you’ll see the results for yourself.
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The article Amazon.com’s Real Growth Strategy Holds Multi Year Upside For AMZN Stock originally appeared on amigobulls.com. Watch our analysis video on AMZN.
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