May 1, 2013, 3:57 PM

Staying in the game

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Amazon, though, keeps upping its game. in March began offering pet medications through a collaboration with a pet pharmacy, a service doesn't offer. Quidsi also recently lowered its free two-day shipping threshold from $49 to $35. It ships out of three warehouses. offers free two-to-three-day shipping on orders of $49 or more. It operates two warehouses, one each on the West and East Coasts, Speiser says. He says that shipping offer is good enough for now, and he understands what it would cost to grow his fulfillment footprint to keep up with Amazon. "Having many warehouses in various parts of the country is a double-edged sword," he says. "Sure, orders get to customers faster, but keeping a mirrored inventory, and wrangling supply to each warehouse, is a significant challenge."

"Significant" might underplay it. Amazon says it spent $6.41 billion on fulfillment last year and operates 89 warehouses globally. That includes an estimated 46 in the United States, with warehouses in all but three of the top 15 metro areas—Miami, Atlanta and Detroit—Wingo says.

Some of that fulfillment expense supports Amazon Prime, the 7-year-old membership program that, for $79 a year, grants consumers unlimited two-day shipping on eligible products, along with access to more than 25,000 TV shows and movies they can stream over the web, and monthly Kindle e-book rentals from more than 180,000 titles. It's Amazon's not-so-secret weapon, and the array of Prime perks is tough for competitors to match.

That's not to say there aren't retailers who are trying. Web-only mass merchant Inc. has its own Prime-like program, though without the digital content extras. Members of the Club O loyalty program pay $19.95 annually to receive free shipping on all orders and 5% in "Club O" dollars back on every purchase, which they can redeem on future orders. It also is setting up a distribution facility in Kentucky, the company's second. For now it only accepts returns, but within a few months will become a full-service warehouse. "That will put the whole country within two days from us," says CEO Patrick Byrne of the shipping advantage.

Estimates for the number of Prime members range from 5 million to 20 million—Amazon does not disclose a figure. A report released in March by financial data firm Morningstar and Consumer Intelligence Research Partners LLC estimates Prime membership at about 10 million, and projects that it will grow to 25 million by the end of 2017. The report says Prime's membership growth accelerated around the fourth quarter of 2011, when Amazon began bundling a free 30-day trial Prime membership with Kindle Fire tablets, of which some 10 million have been sold. The firms estimate between 30% and 40% of Prime trial members later pay to join the program.

Once a consumer joins Prime, she tends to spend more on Amazon, suggests a report from eDataSource. In February, Prime members spent, on average, $48.56 per order, 5.6% higher than the $45.98 spent by other Amazon shoppers. For the month, Prime consumers spent $179.60, 74.5% more than the $102.90 for other Amazon customers. That means Prime members buy on Amazon more often. The market research firm analyzed 35,000 Amazon receipts from its consumer panel for the report.

Some e-commerce experts, while not dismissing Prime's worth, argue that many Prime members are active online shoppers and would likely buy regularly from Amazon anyway. The challenge for Amazon, meanwhile, is to strike a balance between the revenue it earns from the $79 annual fees and the profits on the items available for Prime shipping versus the shipping costs and the cost of licensing the digital content that make Prime more enticing. Morningstar estimates Amazon absorbs $721 in added costs for each Prime subscriber. "They're taking a hit operationally on every treadmill they ship for free to the customer, but the margins on digital content and mass consumables are high," says Eric Best, CEO of Mercent Corp., which helps retailers sell on web marketplaces. "For Amazon, it's all about adding Prime availability to as much selection and volume as possible."

Prime is no doubt one reason many shoppers return to Amazon. In any given month during 2012, 81% of visitors had shopped the e-retailer before, up from 77.6% in 2011, says Experian Hitwise. Among the top 20 e-retailers by revenue, only Netflix Inc.—at 88%—drew more repeat customers percentage-wise.

One way Amazon keeps consumers coming back and buying is by continually adding online stores that serve specific customer segments. Those can include baby boomers, through a 50+ Active and Healthy Living Store it launched in April on that sells such products as vitamins, medical devices and incontinence supplies, complete with discounts for recurring orders of certain products. A similar philosophy holds true for Amazon Mom, launched in 2010 and selling such products as diapers and baby wipes at discounts of up to 20% for recurring orders—plus a free Prime membership trial.

Among the web retailers that have felt Amazon's deeper focus on the mom-and-baby category—mainly via, part of Amazon's Quidsi unit—is Inc. It isn't that the seller of handbags, luggage and related items intends to veer into diapers and bibs, says Peter Cobb, co-founder and executive vice president of the merchant, which took in an Internet Retailer-estimated $199.6 million in sales in 2011. Rather, he says Amazon, with programs like Amazon Mom and sites like, is targeting women who are the primary shoppers for their households. That's the same shopper eBags targets, Cobb says. "They are competing at a higher level than was the case three or five years ago."

That means eBags also has to compete at a higher level, offering products and services that will compel women to think of it first when they need a handbag, not Amazon, which offers a wide selection. Cobb says e-retailers have to "build their competitive moat" against Amazon and other competitors. In eBags' case, those competitors include Macy's and Nordstrom Inc. Cobb advises offering extras that shoppers won't get elsewhere. "We have over 2.6 million customer reviews which detail purchaser likes and dislikes. The result is that we have intimate knowledge of what is and isn't resonating with the customer." EBags uses that knowledge to develop products and services to match customers' preferences, he says.

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