Why I'm Dropping Amazon Prime

It's official: Amazon.com (NASDAQ: AMZN  ) is hiking the price of its Prime membership from $79 to $99, and now consumers have to decide whether it's worth it to cut the Prime cord.

I can see how getting two-day shipping and streaming video for $99 per year will still be worth it for millions of consumers, but I don't happen to be one of them. Seventy-nine dollars was a stretch and, though Prime was a convenience for me, it's not worth another $20 per year. Here's why I'm dropping Prime and a few questions consumers are going to have to ask themselves.

Prime has been a key driver of Amazon shipping more boxes like this one to customers.

Why I'm no longer Prime
One of the great things about Amazon is the incredible selection and low prices on millions of obscure items you don't need to shop for every day. Amazon's not great for buying toilet paper or soda, but it is great for finding calculator batteries, hard-to-find DVDs, or bulk packages of 5-Hour Energy. But what I've found is that these purchases aren't usually needed in two days. They could arrive in a week or longer if I don't have to go to the store and search for them myself.

With Prime, I could buy these items whenever I wanted and get them quickly. Without Prime, I'll bundle these items together and make one purchase every month or two that costs more than $35 and get free shipping anyway. And if I need an item today, I have to go out of the house to get groceries and laundry detergent anyway, so I'll just add it to the list.

The other reason I won't miss Prime is the large number of items that are no longer Prime-eligible. As third-party sellers have expanded their reach in the Amazon store, I've noticed a lot more low prices and high shipping costs on items I'm interested in. Prime has a lot of items, but not everything on Amazon is Prime.

Hulu and Netflix have infiltrated most mobile and set-top devices, but Amazon's absence from Apple TV is a deal breaker for me.

Finally, I don't need Amazon streaming video, and I don't think most consumers would miss it if they have Hulu or Netflix. There's no doubt that Amazon has improved its offerings in the last year, but beyond the first five or six most popular movies, there aren't many titles that draw my interest, and almost every one of those is already on Netflix. Combine that with the fact that Amazon Instant Video isn't on Apple TV and I simply don't use it enough for it to add any value to my subscription.

This could be a boon for Amazon
Amazon will lose some Prime customers, like me, but what will be key to watch with Amazon is how many consumers stay. Estimates put the additional revenue from the $20 price hike at $374 million per year, which isn't chump change, even for Amazon. It could even swing the company back to profitability, although increased content costs may eat up most of the price hike.

There is downside for Amazon
The danger is that a significant number of people leave Prime and take their online purchases elsewhere. Since 2005, Prime has helped drive growth in excess of 20% at Amazon. If a large number of customers cut Prime or membership numbers don't grow, that rate could fall.

AMZN Revenue (Quarterly YoY Growth) Chart

AMZN Revenue (Quarterly YoY Growth) data by YCharts.

Risking growth isn't insignificant for Amazon, because the market allows Amazon to operate without a profit because it assumes the company will continue to grow rapidly for years to come. If a wrench is thrown into that thesis, the stock could be crushed.

Foolish bottom line
Raising the price of Prime is a risk for Amazon, and only time will tell if it's worth the extra cost for most consumers. There's no doubt that most consumers will stay with Prime, but if even 10% leave, it'll hurt Amazon. Count me as one of the customers who won't be paying the extra cost.

The face of retail is changing
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Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 15, 2014, at 1:22 AM, memorandis wrote:

    well this is a needlessly alarmist article. what did you do, short Amazon stock?

  • Report this Comment On March 15, 2014, at 10:39 AM, KodaMcPhilly wrote:

    Effects could be gradual.

    I'm sure I'm one of many whose next Amazon Prime re-up date isn't till around the holidays, October November, I'm sure many people will wait and see, and calculate their cost-benefits in the meantime.

    Agree about the increasing amount of third party suppliers who charge for shipping regardless of Prime.

    Friends who are frequent movie watchers / renters say Prime has a longway to go to catch up with Netflix.

    Like the company and its market share and position, but I'm just not in love with the P/E and price, so may wait for further dips before buying in. Too many things still feel like 1999>2000 all over again, when large investors said "show me the profitability, now" and those high PE stocks seemed to fall the furthest.

  • Report this Comment On March 15, 2014, at 6:55 PM, MichalTod wrote:

    I don't watch anything on Prime, however Prime is worth it for me just based on shipping. I order most everything from Amazon that makes sense to; as a result, I save far more on gas than I spend on Prime, not to mention I don't have the experience of going to stores and finding what I want is out of stock.

    Obviously everyone shops differently, and different people will come to their own conclusions.

    I'm long Amazon.

  • Report this Comment On March 16, 2014, at 10:43 AM, RickRickert4MVP wrote:

    Somehow I was able to get the student rate for Prime, so I'm a subscriber. But I won't be when it goes to $99. I haven't used it to watch any videos yet.

  • Report this Comment On March 17, 2014, at 4:23 PM, Maxtraxx wrote:

    I unloaded all of my Amazon.com holdings. I’ve been a third party seller on Amazon since 2001 – last year they opened a fulfillment center in my city so I decided to take a job to get a look inside the “belly of the beast”. The culture in Amazon.com fulfillment centers is ripe with waste and inefficiency.

    I had really good experience as a third party seller – if you sell a good product at a fair price and are responsive to your customers, Amazon is nothing more than an invisible “broker” who markets your wares, and handles payments between buyer and seller.

    I had (and still have) really good experience as a customer – Amazon does an amazing job of creating a pleasant online buying experience. It never ceases to amaze me how I can have almost anything I need delivered to my door in a couple of days for the same (or less) than going out to a store.

    I wanted to see how they make this happen behind the scenes. Amazon.com has a “wack a mole” approach in the fulfillment centers – management is accountable to a set of metrics that includes production, fulfillment speed, quality control, and safety. Despite the state of the art technology, shipments always went out late by corporate standards. Those shipments made it to customers on time because Amazon routinely pays expediting fees to the carriers (they take a loss on shipping to ensure on time delivery to customers). This helps them meet customer expectations – but does little to help profitability. This is the key reason Amazon is still unprofitable. I saw nothing to demonstrate management’s ability to solve this problem – and it continues to plague them.

    One observation I heard is that warehouses can’t efficiently handle an infinite number of skus – this makes sense. Efficiency of scale may only make sense when you are dealing with a finite number of products. To my way of thinking, Amazon.com could be more profitable if they uncoupled the merchandising and fulfillment aspects of the business.

    Look at it this way, as a third party seller, Amazon was able to collect around 23 percent of my sales. Since I am a good and trusted seller, all of my business was handled through the system - meaning no human intervention was necessary. No warehousing, no inventory, no customer service expense. They collected 23 percent and as far as I can tell, the only overhead associated with the business was the cost of maintaining servers.

    When you have a business model that allows you to collect 23 percent without tons of overhead, why would you choose to take on the overhead and all the risk?

    Perhaps it is only because they needed SOMETHING to do with all of the cash being invested by shareholders. The problem is that Amazon could be more PROFITABLE without all the cash!

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