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Is Amazon Prime Due for Another Price Increase?

By Adam Levy – Sep 30, 2021 at 6:09AM

Key Points

  • Amazon Prime is a $1,000 value to subscribers, according to one analyst.
  • Management added a lot of benefits to the service since it last raised prices.
  • A price hike would have a meaningful effect on Amazon's bottom line.

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Amazon's added a lot of value to Prime since its last price hike.

Amazon (AMZN -1.44%) now counts over 200 million Prime members around the world. About 81 million of those Prime members are in the United States, according to an estimate from eMarketer, most paying an annual membership fee of $119.

Even after raising the price of Prime twice -- in 2014 and 2018 -- the service is still offering huge value for members. A J.P. Morgan analysis estimates consumers get $1,000 of value from subscribing. And after adding millions more subscribers in the wake of the coronavirus pandemic, Amazon may be able to raise its pricing again.

Person in mask packing an Amazon box in a warehouse.

Image source: Amazon.

Why Amazon could raise its pricing

Since 2018, Amazon has added quite a few benefits for Prime members. Some of the most recent changes include:

  • A massive expansion in Prime Video content. Amazon's video and music content expense climbed from $6.7 billion in 2018 to $11 billion in 2020. Amazon's also acquiring MGM Studios, which ought to further enhance its video library. Even after several video streaming services raised their prices by about $1 per month in the past year, Amazon has kept its price steady.
  • Grocery pickup and delivery expansion. Amazon accelerated the expansion of grocery pickup in 2020, reaching all 500+ Whole Foods locations by October last year. In 2018, just 14 locations offered grocery pickup. In 2019, it made grocery delivery free for all Prime members, after it dropped the AmazonFresh subscription price. Last year, it expanded grocery delivery to reach 5,000 cities and towns. That said, it started testing a $10 per delivery fee in some cities last month. A Prime price increase could allow Amazon to keep delivery free.
  • One-day shipping. In 2019, Amazon started to push toward one-day shipping instead of two-day shipping for Prime members. That effort took a back seat in 2020 as Amazon faced constraints in its fulfillment network due to jammed-up supply chains and an influx of online orders. In fact, CFO Brian Olsavsky says one-day fulfillment still isn't where it was pre-COVID. However, as Amazon continues to build out its fulfillment network, it should be able to offer millions more items with one-day shipping.
  • Prescription drug services. Amazon acquired online pharmacy PillPack in 2018, but it's just started to use its assets to get into prescription drug services in the last year or so. It launched Amazon Pharmacy in November last year, and it includes a prescription savings plan for Prime members, who pay without insurance.

What a Prime price increase means for investors

If Amazon sticks to its pattern and the next Prime price increase is $20 per year, that could translate into an extra $1.6 billion in additional revenue just from U.S. households. While $1.6 billion is practically nothing compared to the business's $443 billion in revenue over the last four quarters, consider that nearly all of it will flow to the bottom line. Amazon's operating income over the last 12 months is less than $30 billion, so an extra $1.5 billion presents a 5% boost.

Additionally, Amazon may be able to make similar price hikes in some international markets, where it's also improved the service.

There's potential for increased churn with any price hike. However, considering the immense value Amazon Prime offers, the risk of permanently increased churn rates seems low. Amazon should be able to enact a price increase later this year or in 2022 without much pushback from subscribers if it wants. Keep in mind, however, that the effect won't fully reach the FAANG stock's bottom line until about a year after management makes the price change, since members usually pay for a full year upfront.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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