While the 2008 holiday shopping season brought considerable anguish to the retailing industry, Amazon.com was the standout exception. As rivals lick their wounds and look ahead to a challenging 2009, the retailing giant offered them a measure of salt recently by reporting the holidays were actually its “best ever.”

After posting huge losses throughout its formative years, Amazon long ago quieted cynics who predicted it would never earn a nickel. Like its namesake river, Amazon continues its steady assault on everything in its path. In December, Amazon was once again the top online retailer…by a mile (excluding auction site eBay). Amazon’s December traffic surged 20% year-over-year, outpacing Target.com and Walmart.com’s respective 16% and 15% growth. In contrast, eBay’s December traffic (~80 million unique visitors) remained flat for the third consecutive year.

Amazon’s outstanding performance in December is even more evident when compared with ten rival discount retailers and department stores. Amazon’s share of visits across all of these sites jumped to 39% in December, up 18% from the previous year. This growth came at the expense of nearly every rival, although bankrupt Circuit City and struggling Overstock.com showed considerable weakness, down 44% and 35% respectively. Amazon’s gains were a result of not only attracting more consumers to its site, but also getting them to come back more often. Amazon visitors logged an average of 4.5 visits to the site throughout the month of December. Compare that to the average rival retailer that registered just 2.1 visits per shopper.

There are many keys to Amazon’s growing online dominance, including its zealous devotion to customer service and its masterful use of consumers’ browsing and purchase data to tailor the site for each visitor. This past holiday season, however, Amazon’s success was due in part to its aggressive promotion of the Amazon Prime membership program. For $79 a year, Prime entitles members to free two-day shipping on most orders with no minimum purchase required.

Growing the program was clearly one of Amazon’s key marketing objectives during the holidays. Shoppers responded to its free 1-month no-obligation trial offer by signing up in droves: enrollment averaged 3.4% of purchasers throughout the holiday season. The trial offer particularly resonated with last-minute shoppers. During the peak shopping week that ended December 13th, 4.8% of purchasers on Amazon signed up for Prime.

Amazon seems to have designed Prime with two goals in mind: increase customer loyalty (why would members shop anywhere else?), and to a lesser extent, increase impulse buying.

What impact on members’ shopping habits does Prime have? Does it drive heightened Amazon loyalty? Consider the following observations of Prime member shopping patterns in December:

• 49% of the time Prime members shopped online, Amazon was at least one of the retailers they visited (compared with 29% for non-members)
• 40% of the time Prime members shopped online, Amazon was the first retailer they visited (compared with 24% for non-members)
• 53% of total online retail purchases made by Prime members in December were made at Amazon.com (vs. 29% for non-members)

It’s clear that even when members don’t buy a product on Amazon, membership in the program increases the likelihood they at least consider Amazon for the purchase. Undoubtedly, a large number of consumers who recently signed up for the program will cancel their membership before the trial ends. Yet many, now accustomed to the convenience of the service, will gladly part with the membership fee to avoid downgrading to regular shipping rates and delivery schedules.

As state governments across the country circle Amazon’s growing war chest like starved vultures, retailers of all sizes would be wise to consider the impact on their business of a growing Amazon Prime membership base. I would not be surprised to see rivals experiment this year with similar programs in hopes of countering Amazon’s growing clout. As pressure mounts on retailers, developing strategies to counter Amazon’s new “ace in the hole” will be key to their ability to continue to attract, engage and retain the best online shoppers.

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