Is Amazon Raising the Price for Prime?

Amazon is sending out warning signs that it may increase the U.S. price of Prime, and that might send customers running.

Feb 27, 2014 at 1:55PM

Amazon.com (NASDAQ:AMZN) has not raised the $79 price of its Prime service -- which offers customers free two-day delivery -- in the nine years it's been offered in the United States. That might be about to change.

Since the launch of Prime the company has not only held the line on pricing, it has added a free streaming video service for no extra charge. That video service -- while it's certainly not Netflix (NASDAQ:NFLX) -- offers an array of movies and television shows, including original programming. But now the company has not only publicly said it was considering a price increase, it has raised prices in markets outside the U.S.

Amazon sets the stage

Amazon (and probably all retailers) likely learned from Netflix's botched 2011 attempt to split its digital and DVD service -- effectively a price increase -- that simply attempting to sneak higher prices by your customers is a bad idea. Instead of doing that or just announcing a price increase, Amazon has floated the idea of a Prime price increase to both gauge public reaction and get people used to the idea that a more expensive Prime is coming.

Chief Financial Officer Tom Szkutak announced the possible change on the company's Q4 earnings conference call, as reported the Wall Street Journal.

"With the increased cost of fuel and transportation as well as the increased usage among Prime members, we are considering increasing the price of Prime," Szkutak said. The company is considering a $20 or $40 price increase.

How important is Prime?

The Autobots would still exist without Optimus Prime and Amazon will still exist without Amazon Prime, but neither would be the same. Amazon Prime binds customers to the website. Even if other sites offer free shipping or you could just buy whatever it is you are buying from an old-school brick and mortar retailer, having already paid for Prime leads customers to actually use it and buy from Amazon.

Market research firm Consumer Intelligence Research Partners last year estimated Prime members may spend more than twice as much — $1,340 per year – than non-Prime members using Amazon, according to the Journal. That's a huge increase and it makes it obvious as to why the company isn't making the decision to raise Prime prices without carefully taking the temperature of its customer base.

Some countries pay more for Amazon Prime

Amazon recently raised the cost of Prime in the United Kingdom and Germany, but the move was not a simple price increase. The company is charging more but it has added a free subscription to LOVEFiLM, a Netflix-like streaming video service. This gives the European Amazon users an equivalent  to the Prime Instant Video, which is only available in the United States.

Will people leave?

While the video may draw in some subscribers, the key value of Prime is free shipping. If you're a heavy user of Amazon who wants to order whenever you want and not have to wait until you reach $35 and qualify for free shipping, Prime has always been a good value. A higher cost for Prime may have customers questioning whether it's still worth paying for the service.

At the current price, Prime makes sense for customers who order around 10 packages a year, Randy Allen, a professor at Cornell University's S.C. Johnson Graduate School of Management told Reuters. She based that estimate on an average shipping price of about $7 per order, which she said was conservative.

That volume encompasses a "majority of customers," Allen told Reuters, especially those who order high-ticket items, from stereo speakers to big-screen HDTVs, that would bring even higher shipping costs. For a price point of $99 to $119, customers would have to order 14 to 17 packages a year, Allen estimated.

Survey says don't do it Amazon

In a survey of more than 6,400 current Prime customers, Prosper Insights & Analytics found that 63% of consumers would pay only the current $79 fee for Prime and not a penny more, Reuters reported. An additional 29% would pay $89-$99, and only 8% would pay $109 or more. Granted, a shopping list full of shipping fees could change minds in practice, but the survey still should give pause to Amazon leadership. 

"It's not going to work -- if Prime members get this blanket email that rates are going up $20, Amazon is going to see a push back for this," Pam Goodfellow, Prosper's consumer insights director told Reuters.

Amazon must tread carefully

While it has been great for Amazon Prime customers that the $79 price has held steady for nine years, the company might have been better off raising rates $2 or $3 each year. A $20 or $40 increase will be downright shocking to its customer base, while incremental increases over the years wouldn't have raised eyebrows.

It's hard to argue against the price increase as anyone who drives a car knows that gas prices have gone up over the last nine years. Still, Amazon must be very careful as the survey above shows its customers are very sensitive to a price increase, even if the value offered by Prime remains high.

Netflix has just recovered from its 2011 price hike debacle and Amazon would do well to pay attention to that. Raising Prime prices may be justified, but actually doing it -- even if the company throws in more video or something else of value -- could cause loyal customers to not renew. That might not cause them to leave Amazon entirely, but it likely would mean they will spend less.

Others to watch

Amazon is about to tread dangerous waters, potentially alienating its most loyal shoppers. To learn about two retailers with especially good prospects that are facing a somewhat smoother ride, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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