The Key To Amazon's Success Is Prime

Sep. 4.12 | About: Amazon.com, Inc. (AMZN)

Amazon.Com (NASDAQ:AMZN) is the web's Costco (NASDAQ:COST).

The brightest thing the company has ever done lies below the surface. It's called Amazon Prime.

When the $79/year package was first announced in 2005, it was seen as simply a way to bypass higher shipping costs. And it is. Amazon now ships more packages to Prime members under its free two-day shipping program than it does under its old Super Saver program.

Loyalty breeds loyalty. The most popular products shipped under the Amazon Prime deal are Kindles. Kindles are then used to buy content. Not all the Amazon Prime content deals being announced right-and-left result in free content. Amazon usually charges small fees, $1-$3, for a viewing -- even to Prime members.

It adds up.

Back when the web was first being spun, Seth Godin wrote a great book called Permission Marketing, whose premise was that you seek to constantly increase the level of permission customers give you -- from transaction to subscription to "intravenous" permission, which you usually reserve for doctors and the electric company. A smart web company, he wrote, will give its best deals to its best customers.

That's precisely what Amazon has been embarking on for many years now. Sure, most of its sales come from a small minority of its customers. That's true for every company. Chris Anderson's "Long Tail" theories relate to products, not to customers. When talking about customers, you want loyalty -- fierce loyalty.

Amazon has that, which is why its stock continues to record highs despite the enormous effort here and elsewhere to knock it down.

Disclosure: I am long COST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.