With Prime Price Increase, Amazon Flexes Its Profitability Muscle

The Labor Department said Thursday that U.S. initial jobless claims for the week ended March 8 fell by 9,000 to a three-month low of 315,000. Combine that with a better than expected 0.3% rise in retail sales in February and investors have all the reasons they need to push U.S. stocks higher this morning. The benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  )  are up 0.04 % and 0.10 %, respectively, at 10:15 a.m. EDT. Meanwhile, shares of Amazon.com (NASDAQ: AMZN  ) are up 2.6%, after the company announced that it will raise the annual price of its Amazon Prime service by $20 to $99.

Like millions of other Amazon customers, I received an email this morning informing me that my Prime membership, which entitles me to two-day free shipping on a wide variety of items and access to a large library of streaming movies and television series, would renew at $99 per year instead of $79. The move had been telegraphed, as executives announced on a conference call in February that they were considering a price increase ranging from $20 to $40. Will I continue with the service when Dec. 31 rolls around? Almost certainly. What's the business impact of this price increase?

Amazon has always been coy about the number of Prime members. At the end of December, in an update on its holiday season, the company stated that "Amazon Prime membership continues to grow, and we now have tens of millions of members worldwide." It added that "more than one million customers around the world became new Prime members in the third week of December." Prior to that, Amazon's third-quarter earnings release stated that the company had "signed up millions of new Prime members" in the last 90 days. Those three data points are essentially all the e-commerce giant has ever disclosed regarding Prime membership.

Let's assume (conservatively) that the service has 23 million members, in which case the price hike represents an additional $460 million in annual revenue. (This assumes no cancellations, which is obviously unrealistic but probably a good first-order approximation.) At first glance, that looks like a rounding error for a company that took in nearly $75 billion in revenue last year. However, the revenue number is not the relevant figure here. Consider that those incremental $20 increases will fall largely to the bottom line – most of it is incremental profit. Thus, once you compare the $460 million to Amazon's $745 million in operating profit in 2013, you begin to see that the move has the potential to turbo-charge Amazon's earnings.

Some investors have questioned whether Amazon is stringing the market along, producing scant profit yet commanding a stratospheric price-to-earnings multiple. Today's price increase for Prime membership could be a key milestone in revealing the power -- and profit potential -- of Jeff Bezos' expansive vision for electronic commerce.

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Read/Post Comments (4) | Recommend This Article (2)

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  • Report this Comment On March 13, 2014, at 3:38 PM, wsjnyc wrote:

    I will then start bunching my orders instead to get free shipping. Amazon should not be punishing its loyal subscribers. Actually, if they needed more revenues, they should've been messing with or changing the bunching/bulk ordering that is done by no subscribers to try to pay less for shipping charges and not with the subscribers. I rather they increase my delivery time by one day and make me pay extra for two days delivery that raising my subscription fee. If they go ahead with this I will most definitely move to Netflix.

  • Report this Comment On March 13, 2014, at 8:30 PM, TMFAleph1 wrote:

    @wsjnyc

    Thanks for your comment.

    How is raising the price of Prime "punishing its loyal subscribers"? The price has remained the same for 9 years!

  • Report this Comment On March 14, 2014, at 12:35 AM, rndm6733 wrote:

    BTW, you can currently get Amazon Prime *free* for one year when you sign up for one of the two Blue Cash cards from American Express. It's a special offer they have right now.

    There's the Blue Cash Everyday Card (BCE) and the Blue Cash Preferred Card (BCP). BCP has $75 annual fee; BCE doesn't. However, BCP has $100 initial spending bonus (after spending $1K in first 3 months), 6% cash back at grocery stores, and 3% cash back at gas stations, while BCE has just a $50 initial spending bonus, 3% cash back at grocery stores, and 2% cash back at gas stations. There are probably some other differences as well.

    The math is a bit complicated, so you can use the rewards calculator at CreditCardTuneUp. com to compare the two Blue Cash cards for your particular expenses.

  • Report this Comment On March 14, 2014, at 1:11 AM, SuntanIronMan wrote:

    @rndm6733

    You have to spend $1,000 on your new AMEX card within 3 months to get Amazon Prime free.

    It isn't really free, but rebated. You pay for Amazon Prime, then you get a $79 statement credit 6-8 weeks later once you spend the above mentioned $1,000.

    Only available to new Prime members. If you already have Prime, it won't work for you.

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