1 Big Reason Amazon Prime Still Has Room to Grow in the U.S.

By Adam Levy Markets Fool.com


Image source: Amazon.com.

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About half of U.S. households are already members of Amazon (NASDAQ: AMZN) Prime. With a growing list of benefits -- it's not just free two-day shipping and streaming video -- Prime represents one of the best values in retail.

Still, continued domestic growth may be difficult for the online retailer's loyalty program after nearly saturating customers that can get the most out of it. Specifically, higher-income households are much more likely to subscribe to Amazon Prime than lower-income households, according to a Piper Jaffray survey: 75% of households with income over $112,000 per year subscribe to Prime. The percentage for households over $68,000 is above 60% already.

But a new survey from Baird Capital found that Amazon is quickly growing Prime membership among lower-income (less than $50,000 per year) households, which is the key to its ongoing growth in the U.S.

Getting lower-income households on board

Last April, Amazon started offering a monthly payment plan for Prime. Instead of paying $99 upfront, customers can pay $8.99 per month for access to Prime Instant Video or $10.99 for full Prime benefits. Macquarie Research's Ben Schachter said the monthly plans ought to help attract more lower-income households.

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Of course, it's more expensive to pay monthly, but lower-income households might not be able or willing to spend $99 all at once. The flexibility of being able to cancel any time is valuable to these customers.

Amazon has made other efforts to attract customers looking to save money to Prime. It started offering Prime members 20% off on video game pre-orders at the beginning of last year. Additionally, some items (often offering better pricing) are available exclusively to Prime members.

Baird analyst Colin Sebastian says Amazon's efforts have paid off. Lower-income households are the fastest-growing demographic group for the online retailer, according to his surveys.

Watch out, Wal-Mart

Amazon's ability to penetrate lower-income households could have a meaningful impact on Wal-Mart's (NYSE: WMT) foot traffic. Wal-Mart historically appeals to lower-income households, and Amazon's incredible growth has been one of its biggest competitive threats over the years.

Attracting more Prime subscribers from Wal-Mart's core shopping demographic could have a meaningful impact on how much lower-income households spend at Wal-Mart. Countless surveys show that Prime members spend significantly more than non-Prime members on Amazon.com.

But given the demographic breakdown of Prime members, there's still the question of whether it's simply correlation (higher-income households spend more everywhere) or actual causation (Prime encourages members to spend more). It's likely a little bit of both, in which case Wal-Mart stands to lose at least some sales to Amazon for every new Prime subscriber that also shops in its stores.

Moreover, Wal-Mart continues to battle Amazon for online sales. It recently bought Jet.com, and it is investing heavily in its e-commerce platforms. Amazon's growing Prime membership will make it harder for Wal-Mart to steal away online sales. Even as more sales shift online, Amazon's 60-million-plus Prime households give it a leg up in winning the lion's share of those incremental sales.

Amazon's efforts to attract lower-income households appear to be paying off. As Amazon encroaches on Wal-Mart's core customer base, it could spell bad news for the brick-and-mortar retailer as it tries to grow its own online sales as well.

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Adam Levy owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool has a disclosure policy.