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Amazon Prime Discount Warns of a Subsidized Nation

Image: Amazon Prime Discount Warns of a Subsidized Nation
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By Chris Markowski
Tuesday, 27 Jun 2017 03:19 PM Current | Bio | Archive

Amazon is making a play for low-income shoppers by offering a nearly 50% discount for those on government assistance.

Instead of paying $10.99 per month for Amazon Prime, customers with an Electronic Benefits Transfer (EBT) card will be able to enjoy Prime for only $5.99 per month. Is this a benevolent attempt to help those in need? Not likely.

Cashing in on EBT shoppers

Amazon's new Prime subsidy for low-income shoppers is an attempt to earn more revenue and steal a bigger share of the e-commerce market. By making Prime available to EBT shoppers, Amazon is able to reach 43 million new customers who receive a total of $66.6 billion in Supplemental Nutrition Assistance Program (SNAP) payments each year. According to Morningstar, SNAP users spent roughly 18% of those payments at Walmart in 2016, earning the company $12 billion in sales revenue. Amazon has decided it is time to take a share of that revenue stream for itself.

The company has already capitalized on the upper-income market. A full 82 percent of households that earn over $112,000 per year already use Prime at the normal price point. Low-income households have proven significantly harder for Amazon to capture, with only about half of consumers who earn $41,000 or less using Prime.

In order to break into the low-income market, Amazon has decided to turn the EBT card into a discount card that enables them to distinguish the rich from the poor and ensure everyone pays what they can afford, as opposed to what the service is actually worth.

For roughly 5 percent of the average monthly SNAP payment, cardholders can have all the same Prime benefits as non-EBT cardholders who pay full price. Discount customers get the same music and video streaming, photo storage and two-day shipping for just 54.5 percent of the regular price. This way everyone has equal access, except the wealthier consumers pay more to allow Amazon to subsidize the service for the poor.

It is a good strategy for Amazon. Higher income consumers are more likely to be frequent Prime users, which would drive up Amazon's shipping costs. If they allow access to lower income consumers who are less likely to buy as frequently, Amazon can balance out the costs while collecting an increased number of monthly premiums. As Neil Saunders, managing director of GlobalData Retail, put it, Amazon's new discounted Prime membership "is almost a form of welfare being run by a corporate organization."

Subsidies are becoming destigmatized

Imagine if more companies decided to implement their own "welfare programs." There would no longer be price stickers or menus with single price points, but rather a pricing structure based on what the customer earns. Let us illustrate this with an example: Say it is lunchtime and you feel hungry, so you decide to get a burrito. Under the equal access plan Amazon is trying to utilize, you would carry a card to indicate whether you are a low-income customer or a high-income customer. A low-income consumer would pay a lower price, while a high-income consumer would pay more for the exact same burrito.

Amazon's new tiered Prime offers are the same thing. It sounds different when phrased in the context of a membership plan, but the outcome is the same. Amazon is effectively telling EBT cardcarriers, "You earn less, so we'll charge you less for the same service."

Food stamps used to be stigmatized, but now they are a discount program granting everyone equal access to luxury services. Now that Amazon users see they can easily save money on their subscription by being an EBT cardholder, they will want discounts and coupons at other places. Perhaps next, the government will subsidize their Costco membership. Amazon's move, while fine capitalism, seems to be the first step towards a fully subsidized nation.

Chris Markowski has carried the titles of author, investment banker, equity analyst, and consumer advocate. He is the personality behind Watchdog on Wall Street and founder of Markowski Investments.

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Amazon is making a play for low-income shoppers by offering a nearly 50% discount for those on government assistance.
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