E-commerce giant Amazon.com (NASDAQ:AMZN) announced yesterday that it was boosting monthly membership fees for its popular Prime service. The company is raising the price from $10.99 per month to $12.99 per month -- an 18% increase. Student members that pay monthly will see their prices rise by a comparable percentage, from $5.49 per month to $6.49 per month.

However, the changes only apply to members that pay on a monthly basis. The annual subscription prices ($99 per year, or $49 per year for students) are unchanged. It's been nearly four years since the last Prime price increase, when Amazon bumped the annual price from $79 to $99 back in 2014.

Amazon warehouse employee sorting orders

Image source: Amazon.

Here's everything you need to know about the changes, and why Amazon's making them.

Net shipping losses are growing

There are a couple likely reasons why Amazon is making the change. First and foremost is to generate more revenue to cover rising shipping costs. Amazon used to disclose its net shipping costs each quarter, but abruptly stopped in Q2 2017. The company has been increasingly losing money on shipping costs, and while Amazon has an incredibly high tolerance for absorbing losses if those losses can drive growth, the figures underscore why a price increase is in order.

Shipping losses jumped precipitously in 2016.

Metric

2014

2015

2016

Shipping revenue

$4.5 billion

$6.5 billion

$9 billion

Shipping costs

($8.7 billion)

($11.5 billion)

($16.2 billion)

Net shipping cost

($4.2 billion)

($5 billion)

($7.2 billion)

Data source: SEC filings.

For Q1 2017, the last quarter that investors have net shipping cost data for, net shipping losses widened by 30%.

Metric

Q1 2016

Q1 2017

Shipping revenue

$1.8 billion

$2.5 billion

Shipping costs

($3.3 billion)

($4.4 billion)

Net shipping cost

($1.5 billion)

($1.9 billion)

Data source: SEC filings.

Shipping revenue includes some (unspecified) portion of the Prime membership fees as well as fees earned from merchants for Fulfillment by Amazon (FBA) services, but excludes any shipping fees charged by third-party merchants where Amazon does not fulfill the orders. Amazon now only discloses its shipping costs ($5.4 billion in Q3 2017) but not shipping revenue, so investors no longer have a sense of its net shipping costs, but the trend was already abundantly clear.

Pushing members to annual plans

The monthly subscription option may have been more popular among lower-income consumers or those that don't want a long-term subscription, but the price structure change even more strongly encourages consumers to sign up for the annual plan. 

Tier

Annual Cost (Paid Monthly)

Annual Cost (Paid Annually)

Difference

Prime before price change

$131.88

$99

$32.88

Prime after price change

$155.88

$99

$56.88

Prime Student before price change

$65.88

$49

$16.88

Prime Student after price change

$77.88

$49

$28.88

Data sources: Amazon and author's calculations.

The savings associated with the annual plan just jumped quite a bit. That's a strong incentive for monthly members to upgrade to the annual plan. Of course, Amazon would prefer customers on the annual plan because Prime members tend to spend more on Amazon, and it can foster long-term relationships with those customers while enjoying greater financial visibility.

It's hard to quantify what financial impact the change might have. How many Prime members Amazon has is a closely guarded secret. Even if investors knew this number, they'd need to know the mix of monthly subscribers vs. annual subscribers as well, since the change only affects the former group.

The value is still there

Prime offers such incredible value that it's extremely unlikely that the price increase will cause any type of mass customer exodus. It's comparable to Costco memberships or Netflix subscriptions -- both of which also receive price increases every few years. Those companies' respective member bases don't see any lasting adverse effects from price increases, since they still provide strong value to consumers.

The same will hold true for Amazon.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Evan Niu, CFA owns shares of NFLX. The Motley Fool owns shares of and recommends Amazon and NFLX. The Motley Fool recommends COST. The Motley Fool has a disclosure policy.