Willing to Take a Loss

After spending time speaking about banking and financing for start ups, I got to thinking about a conversation many of us in marketing have to have about products: do we take a loss just to get started? I think you can consider early product development very similar to a start up.

Most recently in the news, Amazon admitted to willingness to take a loss on its Prime loyalty program. Essentially, they are gambling that people who already are addicted to Amazon will be willing to pay an annual fee for additional benefits. It seems crazy when there are all kinds of ways that Amazon has found to cut costs, how is it this program will be unprofitable?

If Jeff Bezos walked into a bank today saying, “We have this loyalty program, and while we’re just taking it out of testing, we’ve actually added services to it while keeping the same price. Wanna help us out?” I don’t know if the bank would be so willing to take the risk.

Even with Amazon’s track record, I get the impression analysts are thinking that the incredibly cost-sensitive and lean Amazon might just be off its rocker this time. According to estimates in the Wall Street Journal, at $79 a year, Amazon is potentially losing $11 annually with an estimated average cost of $90 per Prime member. New services make the loss larger.

So what should a bank do in this situation?

If a start up or product launch was willing to start at a loss, there has to be demonstration of the potential profitability somewhere. For the Xbox360 it was in video game licensing and accessories, and for Amazon it’s in the other fees-based businesses it has. Perhaps that’s the key to really gaining financial traction: seeing the big picture and how other components contribute to the final result.

Prime is supposed to create brand loyalty, which in turn can increase customer lifetime value. A bank can understand that if you have financial information to support it (like that Prime members spend about $1,500 on Amazon a year, triple previous spending).

It makes sense that banks see companies when they’re a bit further along. In many cases, they have matured beyond that first amazing idea into a line of offerings. Sometimes those lines are supporting each other, and that can be where the business changes from being just an executed idea into a game-changing firm.

The Wall Street Journal article about Amazon Prime can be found here.

Category(s): Sustainability
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