Will a $20 Prime Hike Drive Amazon Customers to Netflix and Best Buy?

Amazon's risk with the Prime price hike may be larger than investors expect.

Mar 18, 2014 at 3:00PM

If you're an Amazon.com (NASDAQ:AMZN) Prime member, you likely got an unwelcome email recently about the price of your service. With the company choosing to increase the annual fee from $79 to $99, some observers seem to believe this will only increase Amazon's profitability. This $20 increase equates to less than $2 per month, but this small difference may be enough to drive many Prime members right into Netflix's (NASDAQ:NFLX) arms.

Has Amazon read the research?
According to a February research study by Consumer Intelligence Research Partners, Amazon Prime has an estimated 26.9 million members who seemed to be relatively happy with the previous price of $79 per year. The company found that 94% of the members surveyed said they would "probably" renew their membership at the current rate.

However, when the same members were asked about a price increase to $99 per year, the number who said they would renew their membership dropped to less than 50%. Importantly, the study found that the frequent use of Instant Video was a big factor in whether the members would choose to renew.

Of members using Instant Video at least once per week, 100% said they would "definitely" or "probably" renew at the $79 price point. Even at $99, 69% percent said they would "definitely" or "probably" renew.

Netflix should be happy
Prior to the Prime price increase, you could argue that Instant Video was a better value than Netflix at an average monthly price of about $6.58. However, at $99 per year, a customer is paying $8.25 for Amazon's video selection.

Netflix reportedly carries more than 100,000 movies and shows for $7.99 a month. Compared to roughly 40,000 with Instant Video, this price hike may cause customers to look at Netflix as an alternative.

When we compare Netflix and Amazon's growth patterns, the two companies look eerily similar. Amazon and Netflix reported overall sales jumped by 20% and 24%, respectively, in their most recent quarters. Both companies are investing in their video platforms with previously run movies and television series and original content.

There are two significant differences between Amazon's Instant Video and Netflix, however. First, Amazon only offers annual billing of its service fee and offers no refund if the customer cancels early. Netflix on the other hand, allows monthly billing and customers to cancel at any time.

Second, Netflix offers individual profiles that allow different family members to create their own watch lists. By comparison, Amazon relies on a single watch list. With Netflix winning critical acclaim for originals such as House of Cards, Amazon's price hike may cause customers to modify their behavior with Amazon and take advantage of the much larger Netflix catalog.

An unintended consequence
Amazon's aggressive warehouse expansion may be hurting the value of Prime. A customer without a Prime membership has to order at least $35 worth of goods to get free shipping in five to eight business days. Prime's free two-day shipping is one of the big draws of the service.

However, this price hike will likely lead customers to examine their shopping habits to decide if they can cancel Prime and bundle their orders into $35 blocks or more. Amazon's warehouse locations mean that many customers never have to wait five to eight business days.

The obvious beneficiaries of any Prime cancellations could be big-box retailers. Best Buy (NYSE:BBY) already offers to match Amazon's prices, so why pay $99 a year to get something in two days that you can buy today?

It's no secret that Best Buy has been struggling to compete against Amazon in certain categories. In the last quarter, domestic sales declined by just more than 1%, primarily due to weakness in the consumer electronics and entertainment divisions. However, a consistent area of strength has been the computing and mobile phones division, which recently saw same-store sales increase by 3.2%.

Best Buy has also been investing heavily in its multichannel shopping initiative. Last quarter, online sales reflected this, with an increase of 24%. In addition, the company now offers a ship-from-store option at 400 of its locations.

If customers don't believe Prime is worth $99 a year, Best Buy's results could change in a hurry.

The bottom line
Amazon made a choice to increase the price of Prime effectively by less than $2 per month. While this might not sound like a lot, it may be enough for some of these millions of members to change their habits and decide to cancel the service.

Prime is just one battle in a larger war for your living room
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

Chad Henage has no position in any stocks mentioned. The Motley Fool recommends and 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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