COVID-19 flipped consumer behavior on its head, changing everything from what we buy to how we buy it. In September, Walmart responded to this shift with the launch of a new subscription program. Walmart+, the first major rival to e-commerce subscription service Amazon Prime, gives members exclusive access to unlimited free deliveries, an enhanced in-store checkout experience, and discounts on fuel.

How will Walmart+ differentiate itself from Amazon to gain market share, and can it repeat Prime’s success? GLG spoke with Mike Pazak, former Director at Amazon and current Managing Director at Asterism, for insights into these questions. Below are a few select excerpts from our broader discussion.

Which elements of the Amazon Prime model make it so successful?

When you’re looking at all things Amazon, you look for the three pillars: selection, convenience, and value. Selection means very few exclusions from Prime eligibility, beyond just what Amazon was carrying. So it’s looking at the natural course of what customers are demanding, and getting sellers to put high-demand items into Prime. Convenience refers to the speed of delivery. Prime is fast and free, but we also enabled a form of basket-free buying with “buy now” and one-click ordering. A Prime member doesn’t have to worry about hitting a free-ship threshold. They just select one item and say, “Send it to me.” The third pillar is value. Bezos wants the payback to be so obvious that it’s irresponsible if you’re not a Prime member.

If you look at it kind of through the lens of those three things, the success of Prime is that it’s very customer-centric. We don’t want the customer to have to change their behavior; we want to slipstream into what customers want to do and what they demand.

Can this model be easily replicated by Walmart+?

Any business can follow that course. Now, whether they have the capital to, or whether they have the resources to do it, or even the management discipline to do it, those might be different things. But in terms of, can that formula be replicated? Can Walmart replicate that? Absolutely. No question in my mind.

Amazon built upon its initial digital offering to include Amazon Prime Video, Amazon Wardrobe, Amazon Books, etc. Has Walmart done a good enough job showcasing the value proposition for its subscription model, even if it doesn’t have the same suite of products?

Walmart sells a tremendous amount of groceries, which is a great way to get going, particularly with COVID and the acceleration of the shift to grocery delivery. And then there are gas purchases, another differentiation from an Amazon standpoint. Walmart tends to be competitive on fuel pricing, and it plays to where their customers already value them.

And then they have the mobile scan-and-go, which is more convenience in-store. Self-service checkout has struggled in physical locations due to anti-theft taking front and center, but here we have an engaged customer who’s giving you a prepaid membership. Maybe with more trust involved, they can really get out of the way and drive more convenience in the physical shopping experience.

All in all, because they’re focusing on the customer’s value from them today in particular, I think they’re off to a great start, even though they don’t have the breadth of offering, or the breadth of value offerings that Prime does.

Does Walmart’s in-store fleet create an advantage for Walmart over Amazon?

It’s an advantage on paper. Walmart really dwarfs Amazon from a grocery location ability, and the ability to handle fresh items, frozen items, etc. Now, of course, they must activate it. They must add those locations to the delivery service, to the pickup service, and drive in those geographies.

In terms of customer base, will Amazon Prime and Walmart+ be competing for the same business? Will Walmart convert previously loyal Amazon Prime customers to their platform?

The greatest opportunity in terms of switching over would be customers who are already kind of in their mode. It wouldn’t be necessarily a customer acquisition thing. It would be much more of a loyal Walmart customer who may decide that they don’t need the Amazon program, particularly if they’re not availing themselves with other digital benefits like Amazon Music.

Are U.S. homes likely to choose one membership or have both?

Today, from a grocery standpoint, Amazon has such a limited footprint relative to Walmart. Customers in uncovered geographies are the ripest for Walmart to try to acquire and flip entirely to Walmart+. Until they get the two-day, same-day offering account selection, however, it will be a “both” model in those geographies.

What do you think the total addressable market for subscribers looks like for Walmart+?

They have about 140 million customers a week in the U.S. If Amazon, after 15 years, has 126 million Prime members, and they say that’s about 65% of their market, it’s certainly reasonable to assume that Walmart would have easily 100 million just getting started.

Prime was losing money for the company until it hit a certain subscriber threshold. What publicly available data points could be leveraged to forecast where losses might inflect and estimate the trajectory of margin growth after that inflection point?

The retention metric is important. As you go through any of these subscription-based models, the flip from free to pay, renewals become very important because you don’t want a revolving door. You want to actually be building a base so you can scale. Once you have critical mass, you get a significant subscription revenue offsetting your basic costs. But, you start out negative because you just get the people who are obviously going to get a delivery every day, and you burn through that quickly.

What should investors keep in mind as they try to frame how this business will impact Walmart over the next 12 to 24 to 36 months that they may not be currently considering?

This could be an explosive quarter or two quarters for delivery. The question is, how much can they throw at this? How quickly can they scale it? I think that’s a real risk. It’s a bit of an unknown, the ability of these folks to scale with the workforce particularly from a delivery standpoint with the pandemic and winter months ahead.

Who will enter the subscription space next? Are we likely to see Target enter the ring with their own model?

Target has done a great job with their REDcard Program and building a lot of the same elements of benefits around REDcard. I do expect something from them to get out of the third-party delivery model. I think they’re going to have to have some kind of credible capability with a subscription model. They’ll have to sort out what makes sense for them.

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About Mike Pazak

Mike Pazak is currently the Managing Director of Asterism LLC, a consultancy focused on the e-commerce industry. Previously, Mike served as a Director at Amazon.com, where he held leadership roles across Amazon Commerce Services, Marketplace, Payments, and Advertising. Prior to his work at Amazon, Mike was a founding executive of a $1B+ technology services company across North America, Europe, and Asia/Pacific. Mike began his career with Andersen Consulting (now Accenture), where he became an Associate Partner working with large, global customers in retail, media, and entertainment; consumer products; and consumer electronics in the U.S. and Europe.

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This e-commerce article is adapted from the October 27, 2020, GLG teleconference “Walmart+ vs. Amazon Prime: eCommerce Subscription Models.” If you would like access to the full teleconference transcript or would like to speak with e-commerce expert Mike Pazak, or any of our more than 700,000 industry experts, contact us.