Sam’s Club made a smart move last week and announced they will be testing a new subscription service to battle Amazon; and they are likely avoiding a price war while defending their share. Sam’s Club Testing Online Subscription Service as Threat From Amazon Grows (in the Wall Street Journal). While other retailers have chosen to battle Amazon by lowering prices, Sam’s club is smart in that they will be offering a service, My Subscriptions, which is limited in scope (and therefore containable), is targeted at a specific segment of customers, and addresses the elements of value also targeted by Amazon.
Amazon has been growing and steadily taking market share from many retailers over the past several years. They have attracted customers who enjoy the convenience of shopping online at prices that are competitive, although often not the lowest. In addition, Amazon Prime captured a large number of customers who valued the convenience and time savings of online shopping, but perhaps believed shipping costs would offset the other benefits. With free 2-day shipping on many items plus access to Amazon Instant Video for an annual fee, currently $79, an estimated 35 – 40 million customers joined Amazon Prime and capped their shipping costs. Amazon’s Subscribe and Save offers monthly shipments and a discount (typically 5% – 10%) off the normal Amazon price to customers who regularly purchase certain goods. Most retailers have struggled to defend their share against the Amazon offers and have frequently resorted to price cuts. Those price cuts have caused margins and profitability to suffer.
From our perspective, the elements of value for Amazon customers are:
- Convenience of shopping online
- Time and fuel savings from avoiding a trip to a store
- Convenience and savings of a scheduled order with Subscribe and Save
- Huge assortment of products means you can shop in one place rather than go to many different stores
- Price sensitive customers find Amazon is usually competitive and sometimes, but not always has the lowest price
- Shipping costs can be capped at the cost of joining Amazon Prime
Notice only one of those value elements is price. Customers appreciate the experience and other elements as much or more as the price, and they shop at Amazon because of them. As an example, I am an Amazon Prime member and a Costco member. I know Amazon and Costco have very large assortments, and if it is more convenient to buy something on their websites, I am willing to pay a little extra to avoid going to a store. Of course, if I need to see and touch the item before buying it, the online convenience is not enough to sway me. Sam’s Club is addressing those same value elements. Sam’s is offering an online service with a large selection, scheduled orders that are convenient and save money on a more narrow selection, and a cap on shipping costs.
If Sam’s simply lowered prices to match Amazon’s Subscribe and Save prices, they would end up lowering prices broadly to all customers. By limiting it to the scheduled orders in My Subscriptions, Sam’s preserves the margins on the rest of their business. Sam’s also recognizes that scheduled orders are more efficient, so their order-to-ship costs decrease, and those customers are more loyal. Gross Margins on the My Subscriptions business are likely to be lower, but Operating Income can be preserved by the cost savings from this select group. The net result is much more likely to be a win for Sam’s.
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