There were two headlines coming out of this year’s two-day Amazon Prime event that really caught my attention as I believe they tell a similar story about customer acquisition cost (CAC) and the long game Amazon is playing. For starters, according to an Amazon blog post, “Amazon welcomed more new Prime members on July 15 than any previous day, and almost as many on July 16 – making these the two biggest days ever for member signups.”
Tren Griffin, who writes the blog 25iq and is a long time Silicon Valley veteran, succinctly summarized the broader takeaway:
On the surface, Prime Day appears to be a giant flash sale, but in reality, it’s a ploy for Amazon to sign up more Prime members. This is important to note, as Consumer Intelligence Research Partners found in 2018 that Prime members purchase $1,400 a year on Amazon goods, while non-Prime customers spend an average of $600. Amazon will easily and quickly make back whatever revenue it gave away during Prime Day with the new members it signed up, as those members’ value tends to more than double.
The second headline that caught my attention was that, according to Amazon, “Prime Day was also the biggest event ever for Amazon devices, when comparing two-day periods – top-selling deals worldwide were Echo Dot, Fire TV Stick with Alexa Voice Remote, and Fire TV Stick 4K with Alexa Voice Remote.”
As Brian Roemmele astutely points out, this wave of new users can be evidenced by the surge Alexa is having in the iOS app store rankings from 96 to 36 in less than 24 hours (I imagine this keeps climbing as more people receive their devices):
We don’t know for sure how many Alexa-enabled devices have been sold this Prime Day yet, but Voicebot published an article that points out multiple Alexa items being sold out and currently on back order, including the Echo Show 5, which is on back order until September. There was seemingly strong demand for Alexa devices during Prime Day once again this year.
What strikes me here is that, similar to Prime Day being a ploy to grow the Prime membership base under the guise of a flash sale, Amazon’s method of slashing of Alexa device prices on Prime Day serves a similar purpose with Alexa, as Alexa is a “membership” of sorts. What I mean is that once a consumer has bought their first Alexa or Google smart speaker, and then decides to add more devices down the line, they’ll likely stick with the same assistant as they’ll be augmenting their living spaces with more access points to the same assistant.
According to Voicebot’s Consumer Adoption report published in March of 2019, it was found that 40% of smart speakers owners have multiple devices, which is up from 34% the previous year. So, to Tren Griffin’s point, Amazon knows that while they’re forfeiting margin on the Alexa devices they’re slashing now, they’ll make up on the back end as more people begin buying additional devices.
Furthermore, the bigger picture is that Amazon wants to own the next generation of computing. Amazon missed the boat on mobile and it’s banking on voice assistants (a 10,000 person team-sized bet) as being the future. So, the CAC of Alexa users in the long run will probably be viewed as incredibly cheap in hindsight as the utility of Alexa rises, and fellow voice assistant providers find that the CAC of poaching Alexa customers becomes increasingly more expensive.
Amazon seems to be using the same playbook with Alexa that it did with Prime – “buy” their user base early, on-the-cheap and lock them in with increasing value. Traditional brick and mortar companies are finding today that trying to poach Prime Members is immensely challenging considering all the value Amazon has been baking into its Prime membership; something that none of Amazon’s retail and e-commerce competitors can seem to match as the cost to build a service to compete with Prime, aka CAC, is just too high today.
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