Amazon will soon lose the biggest reason to pay for Prime

Amazon PrimeAP/Patrick Semansky

  • Amazon's Prime membership program offers a lot of benefits, but the most important one is free two-day shipping on more than 100 million items.
  • The companies that represent the other half of online sales are catching up, however.
  • Companies like Deliverr are helping retailers like Walmart and Ebay to also offer Amazon-like, free two-day shipping for more items than ever.
  • As two-day shipping becomes less unique, Amazon has enticed Prime customers through other benefits like same-day and one-day delivery, as well as unrelated perks like Prime Video streaming and discounts at Whole Foods.

Prime could lose a bit of its uniqueness this year.

Customers love Amazon's Prime membership program, which offers a myriad of benefits. But the most important by far is its chief perk: unlimited, free two-day shipping.

Members still overwhelmingly cite the perk as the most important of the subscription, according to a recent survey of 1,160 Prime members by The Diffusion Group. According to the report, 79% of members say free shipping is the most important part of Prime. The second-most popular response - by far - was Prime Video, with 11% saying it's the biggest perk.

Read more: There's still only one real reason why people pay for Amazon Prime

Amazon is able to offer free two-day shipping on over 100 million items due to the company's vast network of warehouses spread all around the country. Amazon spreads its inventory around in these warehouses, which lowers the cost of speedy shipping to every address in the US.

Amazon's Prime shipping offering is currently unique due to how consistent it is and how many millions of items that it sells, either directly or through third-party sellers using the Fulfillment by Amazon or Seller Fulfilled Prime programs.

Amazon has been sitting pretty in this position for a while. But now the rest of retail is catching up.

More two-day shipping to come

Amazon versus Walmart online shopping comparisonBusiness Insider/Dennis Green

Walmart, by most metrics Amazon's biggest competitor online, debuted free two-day shipping without a membership in 2017. The catch: orders must total more than $35 to qualify.

But Walmart still needs to add more selection to its free two-day shipping offering to keep up with Amazon. It does offer millions of items, but not quite the 100 million items that Amazon boasts.

Walmart only carries a little over half - about 55% - of Amazon's one million best-selling products, Cowen said in a report to investors in October. Amazon's top one million products account for about 80% of sales on its website, Cowen said, representing a weakness for Walmart.

Read more: Walmart still has a big weakness in its battle against Amazon

Walmart management agreed that the gap of assortment between Walmart.com and Amazon.com is still too large, Cowen said, noting that Walmart called expanding assortment a "top priority."

One of the ways Walmart is doing that is allowing third-party merchants to sell on Walmart.com with a green two-day shipping badge. The initiative started in October, and the retailer said it hopes to expand it over the coming months. Previously, only items sold directly by Walmart were given the green tag.

Not all merchants are equipped to handle the grueling demands of two-day shipping, however, especially without massive warehouses spread throughout the country. But companies like Deliverr, which partners with large merchants like Walmart, are sprouting up.

Read more: Walmart is offering free 2-day shipping on 'millions more' items - and it reveals a key advantage over Amazon

Deliverr uses a network of leased space in warehouses around the country to mimic the services of Amazon, according to cofounder Michael Krakaris.

He says that in 2019, "more parity [will] come to the space, where a retailer now can offer free two-day shipping anywhere they sell" through outside companies like Deliverr, Krakaris said.

He said his business with Walmart is "really rapidly scaling," and he estimates that 30% of Walmart's third-party sellers use Deliverr.

The end result: millions more items listed on Walmart with a free two-day shipping option, which can help it compete with Amazon and its services that allow third parties to sell with a Prime tag. Customers purchase items that ship quickly much more often than items that ship with a standard or unknown shipping speed.

Sellers can use Deliverr to list products for two-day shipping on Walmart, Shopify, and Ebay. If the model is ultimately successful, it could lead to a proliferation of two-day shipping offerings among the merchants that account for the roughly half of online sales that aren't captured by Amazon.

Read more: A survey found that Amazon Prime membership is soaring to new heights - but one trend should worry the company

Amazon probably realizes this is a potential weakness for its Prime membership, and that its lead in offering two-day shipping won't last forever. That is likely a driver in its adding things to Prime, like original content for Prime Video and Prime discounts at Whole Foods, which have been costly to implement and maintain.

Time will tell whether Amazon will be able to convince its over 100 million US Prime customers to stay, however.

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