Last week I talked about ambiguity aversion; how we prefer known risks to unknown risks. Although guilt aversion does not revolve as much around probability, it does play a large role in gift giving and shopping. To put this idea into context, behavioral economist Dan Ariely describes a scenario in which you encounter a coat at a store that you would like to buy, but realize it’s twice as expensive as you originally guessed and decide you cannot justify buying it. You get home to see that your significant other has bought you the exact same coat out of your joint checking account. Ariely argues that most people would react with a “thank you I love it!” rather than thinking back to the economics of the coat. This is because your significant other purchased the coat for you without making you contemplate the guilt associated with the purchase.
Although this is a broad example, we are able to see that Amazon is doing something quite similar with Amazon Prime, whether or not that was its goal. Amazon offers two different ways to get free shipping, first off through Amazon Prime, users can pay an annual fee of $99 (originally $79) and receive two day free shipping on a wide selection of “Prime” items. Amazon also allows those who don’t have Prime to get free shipping on orders over $25. The company announced that it sells a substantially larger number of items through Prime shipping than its free shipping deal.
Why would people be willing to pay a flat rate for unlimited free shipping if they are unsure of how much they are going to buy throughout the year? The answer for most shoppers is simple; it gives them the ability to get fast free shipping on a large selection of items without feeling guilty about it. It also, to Amazon’s benefit, incentivizes shoppers who have paid for Prime to turn to Amazon first for whatever item they are looking for because they don’t have to feel as bad about ordering it online verses commuting to the store for example. For the first time we are seeing large numbers of people buying things like batteries and coffee beans online, through Prime, rather than in stores, based off of pure convenience.
Whatever it is that Amazon did tap into with Prime seems to be working for them as Prime members on average spend $1,500 a year compared to a non prime member who spends only $625 a year through the website. Another site reports that after users became Prime members they spent 150% more on Amazon, probably buying things that they wouldn’t have in the past. With Prime, Amazon has been able to eliminate the guilt that comes along with online shopping in one annual payment, putting themselves not only at an advantage over other online retailers but also in person retailers.