Amazon Prime Improves Its Customer Retention Rate

By Markets Fool.com

Once Amazon gets someone to sign up for its Prime service, even for a free trial, the company does an impressive job of holding onto that member.

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After the 30-day free trial expires, new research from Consumer Intelligence Research Partners (CIRP), shows that 73% become paid members. After that first paid year expires, 91% of Prime members renew for a second year while 96% of those subscribers pay for a third year, according to CIRP. Those numbers have been improving steadily since the quarter ended in September 2015 and have risen above where they were when the company raised the yearly charge for the service from $79 to $99 in 2014.

"With Amazon Prime, Amazon confronts two or possibly three critical moments in retaining members," said CIRP Founder Josh Lowitz in a press release. "It needs to persuade 30-day free trials to pay $99 for a full-year membership, and then persuade first-year paid members to renew for a second year. It also needs to persuade second-year members to continue a membership, ideally to continue year after year."

Basically, Amazon is operating its premium service in the same way rival Costco sells memberships to its warehouse clubs. Instead of selling month-to-month memberships, which allow people to jump in and out, like most streaming services do, Amazon and Costco customers have to make a big decision once a year. [Prime did recently start offering a monthly option, which sells for $10.99 per month, though that became an option after the CIRP survey.]

Focusing on a yearly membership is a pretty big risk, but it has clearly paid off for Costco and for Prime, which offers members free two-day shipping, a video streaming service, and a bunch of other perks. The boost for Amazon is that Prime members spend more on Amazon.com than those who aren't members.

Free shipping is one of the major draws for Amazon Prime and the company uses a mix of robots and people to offer two-day service. Image source: Amazon.

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How does Amazon compare?

According to CIRP, which based its finding on a survey of 2,108 U.S. shoppers, Amazon retains 91% of its paid members for a second year. That compares very strongly to Costco, which reported a 90.4% renewal rate during its Q3 2016 earnings call in late May. The warehouse club has seen its retention rate tick down slightly due to changing its credit card provider.

Costco does not generally offer free trials, so it's fair to compare retention rates once a consumer actually makes the decision to join Prime. Essentially, if the CIRP numbers are accurate, Amazon and Costco are roughly tied when it comes to holding onto customers. That's even more impressive for the online retailer when you consider that its annual membership costs $99 while the warehouse club only charges $55.

To put these numbers into context, if you take the roughly 9% annual membership loss Amazon and Costco experience, it works out to about 0.75% churn each month. That's dramatically better than the four major United States wireless carriers, which all have churn numbers over 2% each month, according toStatista.

It's also comparable to the 9% annual churn for Netflix , which tops all streaming services, and much better than the 50% rate for Hulu, according to research from Parks Associates. Aside from Netflix, streaming services tend to have a more volatile churn rate because most make it very easy for consumers to join, cancel, and then join again. That's a pattern people are likely to follow as they join a service for specific content and then quit once they have consumed it.

Amazon Prime is clearly a big draw

These numbers put Amazon on equal footing with Costco, which has generally been considered the gold standard for member retention. The results, which CIRP based on its quarterly surveys of U.S. Amazon shoppers, show that Amazon offers a very compelling product, but the most impressive thing may be the growth in retention between year two and three.

"Once Amazon Prime members renew for a second year, Amazon appears to have attracted them for the long haul" said Lowitz. "After a second year, renewal rates are over 95%, and have improved gradually in the past two years."

That's very good news for investors because it costs money to attract new members (whether that be through free trials or marketing costs) but retaining them is free. Holding onto Prime members gives the company a stable customer base that has steadily grown.

The article Amazon Prime Improves Its Customer Retention Rate originally appeared on Fool.com.

Daniel Kline has no position in any stocks mentioned. He does not even think about when his Prime membership renews, but he is on the fence with Costco. The Motley Fool owns shares of and recommends Amazon.com, Costco Wholesale, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.