Will Disgruntled Customers Turn to This Competitor?

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Click Here Now  (NASDAQ: AMZN  ) just raised the cost of its Prime membership by $20, to $99 from $79. This is great for the stock and doesn't hurt consumers that much. For me, it's the price of one parking ticket at the mall. However, a lawsuit that is gaining traction and seems almost timed to coincide with the price increase may open the door to competition funded by Yahoo!'s Alibaba and American Express.

Double-dipping on shipping?
Amazon has been accused of double-dipping by encouraging its sellers to increase prices by the cost of shipping. According to the lawsuit: The "defendant encouraged vendors who use Amazon to ship its items, to mark up the prices of these items to ultimately include shipping charges. Furthermore, defendant provides these vendors priority by showing their items first in the Prime member's product search results."

The price increase definitely benefits investors, but after a UBS survey, analysts were "'negatively surprised by the results,'" according to "Although 94% of Amazon Prime customers surveyed said they were likely to renew at the $79 level, 'these percentages dropped precipitously when price increases of $20 and $40 were introduced (to 58% and 24%, respectively).'"

What do you think? Does this change how you would use Amazon?

Shoprunner's foot in the door?
The bigger question to me is whether competitors can use this negative publicity to win a chunk of Amazon's customer base. Shoprunner went to the trouble of even setting up a separate page devoted to unhappy Amazon Prime customers. Shoprunner began offering a year of free two-day shipping after Amazon's announcement was made. With 85 partners, including prominent retailers like Babies R Us and GNC, Shoprunner might become a convenient place for former Amazon Prime customers to order their weekly supply of diapers, formula, and caffeine pills.

Financed by Alibaba and American Express
Shoprunner is a members-only service that is backed by Alibaba and American Express and led by Scott Thompson, former CEO of Yahoo!. In October 2013, Alibaba led a $210 million round of financing. You have to wonder, with an ex-Yahoo! CEO and backing from Alibaba, how the U.S.-based Internet pioneer fits into the equation of online shopping.

Fiona Dias, the company's chief strategy officer, sees Shoprunner as a conduit for existing brands. Dias said in an interview, "ShopRunner is about making online shopping easier without consumers breaking with their favorite brands" -- and Amazon does not carry goods from most of the other top 100 online retailers.

An Amazon armada?
In December, many Amazon customers were left present-less as UPS was unable to accommodate as many as 5 million last-minute orders. Amazon responded by offering gift cards to people whose packages did not arrive as promised. This might be catalyst for Amazon to build out its own fleet of delivery vehicles.

According to James Tompkins, who runs a Raleigh, N.C.-based consultancy, Amazon is planning to use an internally developed fleet to serve the top 40 markets, which accounts for half of the population in the U.S. Tompkins indicated that Amazon has a timeline for its rollout, but that he is unaware of the details. The service was planned before the Christmas season and was intended to be only for AmazonFresh, but in light of potentially increasing competition, this could be expanded at some point in the future.

Is a premium valuation still warranted?
After negative press from unfulfilled Christmas orders, Amazon is now being sued for possibly forcing customers to overpay for shipping. These problems are coinciding with Shoprunner's launch and may push customers to consider an aggressive second vendor. Going forward, if increasing competition causes growth to slow, Amazon's valuation, at 600 times trailing price to earnings, may come crashing down.

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Read/Post Comments (21) | Recommend This Article (2)

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 24, 2014, at 3:47 PM, DukeMontrose wrote:

    This superb contribution in the best Motley Fool tradition, seems to confirm a comment this fool made here a few days ago on AMZN., priced at 600+ X EPS.

    There is that folk wisdom:

    The trees don't grow to the skies".


    "The exra-ordinary delusions + madness of the crowds: by John Marley, published in 1636, during the infamous tulip mania when a bulb was priced at 600+ X the yearly wage - or whatever.

  • Report this Comment On March 24, 2014, at 3:57 PM, trdr2012 wrote:

    There are obviously people who have lost their perspective.

    This is the first price increase since prime membership was initiated in 2005 and taking into account inflation the price increase is moderate and in line.

    Not any different than Costco or other club memberships that have raised their membership fees.

    Unrealistic to expect prices to remain the same, let alone go down.

    I'm a prime member and very satisfied with the service...AMZN product availability and overall service, user interface and streaming.

    Without question will maintain membership.

  • Report this Comment On March 24, 2014, at 4:18 PM, mljackson1 wrote:

    I agree with trdr2012. I have been a loyal customer of Amazon for years. If you average one order per month, the Prime membership pays for itself at $100.

    Prime streaming video is a bonus.

  • Report this Comment On March 24, 2014, at 8:48 PM, ibarz wrote:

    I tried shoprunner and it is an AWFUL service. They promise you 2 day shipping but that was not the case for me. I cancelled it right away.

    Amazon prime is quite a good deal especially if you share the cost with your family. Remember that prime allows you up to 4 family members.

  • Report this Comment On March 24, 2014, at 11:34 PM, MurphyG9 wrote:

    The price hike comes along with a lot of shady behavior within the last year or two. Although I'm not sure about the Prime eligible purchases being up-ed to make up for shipping, I've run into the problem of sellers showing up that end up NOT being Prime even when I check the Prime eligible only box. It's basically bait and switch. I assume that when I click on a product that is clearly marked Prime, all options under that prime selection are actually Prime!!! When in reality it's only (for example) the XXXL clothing size. All the other sizes are not prime eligible. It's an underhanded trick that provides these vendors priority by showing their items first in the Prime member's product search results, when in fact, that is absolutely not true!

  • Report this Comment On March 25, 2014, at 12:54 AM, jimhunter wrote:

    Over the past year, I have cancelled several orders with Amazon, due to deceptions with respect to what is supplied by a vendor and what the shipping cost will be. Sometimes, you can't ascertain either until the complete order is posted at the end, which results in nasty surprises. Examples: (1) $14.99 shipping was charged for a small cable costing $8.99; (2) a girl's doll weighing less than a pound and quoted at $27.99 carried a shipping charge of $16.99. I cancelled the entire order, and (1) got the cable at a local Microcenter store, (2) got the same doll at a local Toys R Us for $21.99. From now on, I am going to try the local businesses first and avoid Amazon as much as possible. Amazon's deceptive business practices and their out of control vendor shipping costs leave a very bad taste. I am trying to be as polite as possible here, but Amazon has to stop thinking customers are totally stupid.

  • Report this Comment On March 25, 2014, at 6:05 AM, TYPEONEGATIVE wrote:

    "on March 24, 2014, at 3:57 PM, trdr2012 wrote:

    There are obviously people who have lost their perspective.

    This is the first price increase since prime membership was initiated in 2005 and taking into account inflation the price increase is moderate and in line."

    WRONG. This is at least the third price increas. They've taken away thousands of formerly free Prime shows and made them pay only. Secondly, they started the "add-on only" items. Even with Prime, you have to spend $25 to be able to get them at all.

    No wonder food manufacturers get away with decreasing package sizes, people like you are oblivious to real cost vs content..

  • Report this Comment On March 25, 2014, at 7:47 AM, surfrider71 wrote:

    Yes the price is going up but what isn't? I have had a very good relationship with Amazon and Prime for years and i am not going to be reactionary and act like a spoiled child and cancel because of their rate increase!

    I am going to cancel my Dish TV service as there is very little to watch and I am paying for a whole lot of junk that I never watch. One months service with Dish is actually more than an entire year with Amazon!

    So I guess you need to look close at where your money goes and what you value the most.

  • Report this Comment On March 25, 2014, at 8:01 AM, starflyer59 wrote:

    I most likely will not renew my memembership. I don't really buy that much off Amazon and the movie selection for amazon prime customers has very little added content. We have watched just about everything they have to offer. They very rarely add anything worth watching.

    That's $99 dollars that i can spend on something else.

  • Report this Comment On March 25, 2014, at 8:45 AM, JoeDrager wrote:

    As a Prime member, what has always irritated me most is Jeff Bezos' in my face support of his left and far left causes and agendas.

    There is a good niche for a conservative to arrive on scene.

  • Report this Comment On March 25, 2014, at 9:43 AM, cookiejarraider wrote:

    Ok first off I seen so many lies by comments on this It makes me want to puke. First off you can see how much shipping is before you ever complete your order, in fact you can choose the speed vs cost method you decide is the best value for your product. Second no one is buying products from amazon they can go to the store to buy for more money online and wait for it. That kind of non sense just shows how ignorant some people are about this online shopping. You buy from Amazon to buy things that are not in a store or are of better value, that has always been the appeal of online shopping, that it provides a less quick sure, but cheaper value in the long run. So all the people out there attacking amazon are just liars and scammers trying to promote another product as being better. When in fact Amazon will make sure your product is quality and good or you get your money back. I have had nothing but great experience with Amazon.

  • Report this Comment On March 25, 2014, at 11:22 AM, strattitarius wrote:

    Let's tear this apart with common sense. Even among this group of apparently somewhat successful people, it is rare to find.

    First, the Amazon price increase is minimal. The value is still present for the consumer. Yes that survey is quoted much, but as with any survey, you can make the results say what you want. Want a negative response? Simply word the survey as such:

    "How likely are you to renew your membership? Okay, great. Now, what if Amazon decided to up the price by 25% to satisfy unhappy shareholders without any additional benefits. Would you still renew?"

    Or for a positive response:

    "If Amazon were to continue to increase or keep the same the amount of prime videos, and continue to provide you with free 2-day shipping, would you accept a modest increase in price of only $1.67 per month to cover rising fuel costs?"

    What a difference, huh? Surveys suck. Take them with a grain of salt the size of Texas.

    Also, Alibaba is not currently a competitor. They might be at some point, but they are much more geared to B2B. Nobody is buying diapers, toothpaste, crackers, video games, pool cues, and all the other crap I have bought from Amazon in the past month. It just isn't happening.

    Shoprunner looks like a poor attempt at this point. It's a "club" that tries to mash together 100 different sites. It had 1.2 million in revenue last year. By the way, it charges $79 per year just like prime did. So you can't beat up on Amazon claiming they can't make money, then prop up Shoprunner as a competitor that might take some of that profit, as they look to have a similar business model (minus the "little guy" marketplace, warehouse, fulfillment, cloud services, and streaming video - but other than that it's right there as a competitor).

    Now, I am not valuing the company or the stock price at $350, but neither did the author. You can speculate on that elsewhere. This article is focusing on the consumer draw of Amazon and other (cough) rivals (cough). Mr. hbk72777 may have found that Amazon is screwing him, but I have found that I can’t find many items cheaper than what I can find on Amazon. Not to mention I live about 50 miles from a Best Buy, 30 from a Wal-Mart, and 70 from a Costco…. So online can actually charge me a premium of about 5% and I would still buy it, as it saves me the trip, time, money (gas), and the headache.

    So rant on Amazon haters. I am sure the millions of dollars flowing through the company with millions of satisfied customers irks you and the fact that you didn’t invest at $100, but the company isn’t going out of business because you can find some 2-bit competitor that did OVER $1 MILLION in sales last year! By the way I missed it at $100, too. So that does irk me.

    Oh yeah, let’s get some more clicks. AAPL, Samsung, Android, iOS, wearables, Costco, Netflix, Cloud

    That should do it!

  • Report this Comment On March 25, 2014, at 11:49 AM, realmccoy wrote:

    The problem isn't the increase in cost exactly, Its the lack of increase in my wages. I understand inflation and that prices need to rise but my paycheck isn't going up and I can buy fewer things with it. Something is going to have to give and as much as I love Amazon, it is going to be my Prime membership.

  • Report this Comment On March 25, 2014, at 12:23 PM, strattitarius wrote:

    Real McCoy,

    If you are struggling to pay the $99 yearly fee, it's doubtful that you were providing much revenue to Amazon.

    Just like Costco doesn't really care if the family making $40k - $60k shops at their store, I would imagine that Amazon's target market is not those struggling to make ends meet.

    I am not trying to rub this in your face as just a few years ago I was broke as a joke, but I just spent over the $99 fee on a pool cue that's been used 1 time since purchased. The $99 yearly fee won't phase me. Amazon, as well as most retailers, are going after those with disposable income. At this time, Amazon is not competing with Wal-Mart for the low end grocery and daily living items. The crackers I bought were not saltines, but soy-free, peanut-free, organic crackers that my son has to have (or nothing is an option) that you can't buy within 100 miles of my house. The toothpaste was Tom's of Maine, not Colgate.

    Yeah, $99 is a lot when you are struggling. But then you weren't going to spend $1000 at Amazon this year, were you? Or at alibaba? Or at shoprunner?

    Or maybe you will buy some stuff on Amazon and just wait 5-7 days for it to show up. I pay $99/year because I want my crap now, and I have the money to spend. It's not much different than many other conveniences we pay for. And yes, just like those other "nice to haves" it will go first when tightening the belt for many people. However since I use Amazon and believe it saves me money, I would probably continue to pay the prime fee even if tightening the belt.

  • Report this Comment On March 25, 2014, at 1:42 PM, clambj wrote:

    I'm not sure what all the hub bub is about. First, as a Prime member, I was just give a year notice that the cost of my membership will increase by $20. That's a long time to consider whether the cost increase is worth it. Second, it's up to the consumer to search for the best price they can find online. If you're already online, it's as simple as googling the product. Exactly how lazy are you people? Lastly, if you use the free shipping frequently, it's still a great deal. Add in free video streaming and eBook rentals and it's pretty much a no brainer to me. If you don't like it, you still have a YEAR to decide that.

  • Report this Comment On March 25, 2014, at 2:40 PM, mspls4 wrote:

    I still haven't made up my mind yet, here is my problem, you want to raise rates, that's okay, but 20.00, they were wanting to raise it 40.00, that is a huge increase at once, so you didn't raise prices for years, not my problem, should of done small increases, what you are doing is starting a trend a lot of business are now thinking, why raise 5.00 when we can raise 20.00, just greed, you are not fooling anybody, five dollar raise would of been acceptable, why do we pay for your bad business dealings, it's just like the banks, one charges a new fee, the rest run to do the same, greedy monkey see, greedy monkey do.

  • Report this Comment On March 25, 2014, at 2:56 PM, altizar wrote:

    I just ordered a 50lb bag of Sunflower seed for 30$ from amazon with free shipping. About the same price as I would get at the local Walmart if they still carried what I wanted. Of course I don't have to pay the 10% local sales tax, so in fact I'm saving money with amazon, course without the free shipping it'd cost 45$ more from amazon. . .

  • Report this Comment On March 25, 2014, at 9:03 PM, warpig6558 wrote:

    I love Amazon Prime and will gladly pay the extra $20. No tv ads vs 4-6 ads on Hulu Plus. Free shipping on some stuff. Free book and lower prices for their Kindle books. What's not to love.

    I imagine if you only used one of the Prime services you might be leery, but for the power users they are the best.

  • Report this Comment On March 25, 2014, at 11:16 PM, spinod wrote:

    All I wish is a pick and choose method. I haven't used their streaming service at all since becoming a member again.... so stating "we offer video streaming now" to justify a price increase does nothing for me. Other people probably don't own a kindle so the free monthly books (only 1 per month....) is useless to them.

    Take those out and the price should stay down.....

  • Report this Comment On March 25, 2014, at 11:45 PM, chrismireya wrote:

    @ trdr2012:

    This isn't JUST about the sudden $20 increase in AMAZON PRIME membership. It coincides with the recent loss of steaming content for PRIME customers as well as the now-obvious price-fixing scandal.

    I've noticed sudden increases in the price of items that I was looking at. The "savings" with Amazon suddenly goes from a few dollars to a few cents.

    This week, one item was priced at $46 during my search. When I clicked on it, the price suddenly jumped to $69.25 -- a savings of 74 cents from retail price (*for an item that never sells at retail price at Wal-Mart, Target or elsewhere).

    AMAZON is shooting itself in the foot. It was appealing because you almost always saved money at Amazon. This is no longer the case. When you work in the $100 a year cost for PRIME, the value erodes even further.

  • Report this Comment On March 26, 2014, at 2:54 AM, doawithlife wrote:

    I will agree the entire prime thing is a little blown up. Prime gets some deals and sometimes there is deceptive behavior. Always happens, in every market. Really sad people have not learned to look for this.

    Fool me 7 times?

    That being said, I hardly shop Amazon anymore. I use to love them, was a die hard fan. $3-5k per year easily. Now I find lower prices with a quick search of the internet. Amazon is frankly over priced most of the time now. I love the gold box deals where I can go onto walmart dot com and find it cheaper. It happens more often then you would think, and for walmart of all places to beat Amazon. Just sad. Warehouse deals are about the only sales worth beans left.

    I just picked up two more k750's, $29.99 each from microcenter. Lowest price ever on Amazon, $36.70. I could go through a list of last years purchases where Amazon wasn't even a contender (after weeks of watching the prices, in some cases months of watching).

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David Eller

I started contributing to the Motley Fool in 2013. I have held research positions at two investment banks and two hedge funds before trying more entrepreneurial ventures. I'm passionate about helping people find freedom in financial independence. Feel free to add comments and start a discussion. I hope to use these articles as forums to learn from you as well as share my opinion.

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