Losing to Win: The Truth About Amazon Prime

Posted on November 5, 2018

On February 8, 2010, DJ Khaled graced American ears with the release of the seminal piece of culture “All I Do Is Win (featuring T-Pain, Ludacris, Rick Ross, and Snoop Dogg).” Sports would never be the same, as nearly every team in every sport has since adopted the song as an anthem. The song played shortly after the greatest punt return of all time, prompting my then 70-year-old grandfather to sing along as T-Pain laid down some auto-tuned bars.

But perhaps, only winning isn’t the optimal gameplan in the long run. Maybe by losing the battle, you can blow the competition out of the water to win the war. Enter Amazon Prime, the champion of the online Loser’s Club. Prime has pushed Amazon into the juggernaut that it is, driving competition out of business, and gobbling up market share. And how do they consistently do this? All they do is lose.

Amazon loses money on Prime subscribers. According to GeekWire, Amazon lost an astonishing $7.2 billion in 2016 as a result of offering free shipping to Prime users.

This isn’t going to slow down any time soon, because Bezos’ business model has always been able to focus on the long term. In a letter to Amazon shareholders in 1997, his first point of focus states that “[Amazon] will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.” Whereas those short-term profitability considerations and Wall Street reactions would be cause for concern when considering the loss Prime takes, Bezos’ long-term strategy was indeed focused on market leadership.

With this long-term vision in mind, Amazon has built the capital to wait competition out. When Diapers.com posted big profits selling diapers online, Amazon started undercutting the prices. They lost a tremendous amount of money in the short-term, but in 2011, Quidsi, the parent company of Diapers.com, was forced to sell to Amazon. You’ll now find that Diapers.com redirects to Amazon’s diapers page. This is the case with any business selling on Amazon. If you’re selling a product, Amazon will take what you’re doing well, make their own version, sell it cheaper at a loss, and when people buy that product over yours, you lose or sell. Amazon holds 50 percent of the market share of e-commerce sales, and that share is only growing.

This is the genius of Bezos and his incredibly patient investors. The willingness to take a loss in order to focus on a satisfying customer experience has built Amazon to what it is. Bezos best explains this to his shareholders, saying, “Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view, and the interests of customers and shareholders align.”

By prioritizing market share, and being willing to stay the course in the short-term, Amazon has become a trillion dollar company that simultaneously posts very narrow profit margins. Choosing growth and market share over profit has eliminated competition, and raised the long-term potential for greater profits.

As you can see, posting a loss in the short-term is the business model for Prime. If you’re selling on their marketplace, they can afford to wait you out, and then take your market share when your store is broke. This is the Amazon way and truly emphasizes that Bezos has money on his mind and can never get enough. Every time he steps into a venture, long-term profits go up — and they stay there.