On Feb. 3, Amazon (AMZN 0.81%) announced it would be raising prices on Prime membership. The move comes after several years of enhancements to the program that offers fast and free shipping to members, among other benefits. The last time Amazon raised Prime membership fees was in 2018.
Similarly, Costco (COST 1.57%) has not raised membership fees for several years. Since Amazon announced a bump in its subscription fee, that could give Costco reason to increase its membership fee as well. Let's look more closely at the two programs and what the fee increases could mean.
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Amazon hikes Prime fees for the first time since 2018
Amazon said it would be increasing the price of Prime membership in the U.S. The monthly cost will go up from $12.99 to $14.99. The annual membership will go up from $119.99 to $139.99. These are the first price hikes for the service since 2018. Note that Amazon has increased the customer value a Prime membership provides over those years, so there is more bang for the buck. For new members, the price hikes go into effect on Feb. 18. For existing members, the increases start after March 25 on the next renewal date.
Arguably, the most attractive feature of a Prime membership is access to fast and free shipping on millions of items. In that regard, it has expanded the availability of the service to 50% more items since 2018. Another lucrative benefit for Prime members is access to Prime Video, a streaming service that has tripled the number of originals since 2018.
Since the pandemic onset, Amazon has experienced a surge of new customers and engagement. The momentum continued despite economic reopening in its most recent quarter, with the e-commerce giant adding "millions of new Prime members" and sustaining high customer renewal. Amazon boasts more than 200 million Prime members (I will assume an equal mix of annual and monthly subscribers). An average increase of $22 per year on 200 million members could add in an incremental $4.4 billion of annual revenue for Amazon.
Shoppers may be more receptive to a price hike from Costco
Costco is a membership warehouse retailer with the bulk of its locations in the U.S. Consumers must purchase a membership to gain the privilege to shop at one of its brick-and-mortar stores (they have employees who check for membership before entry). Over the decades, Costco has gained a reputation among consumers for offering excellent value. That incredible value can partly explain why Costco has sustained an operating profit margin of between 2.8% and 3.4% in the last decade, despite nearly doubling revenue from $99 billion to $196 billion in that time.
Its philosophy is to use its growing scale to deliver better customer value. It's paying off -- Costo boasts a membership retention rate of 91.6%. Like Amazon, Costco experienced a surge of revenue and customers since the pandemic onset. As of Nov. 21, Costco had 62.5 million member households. The company has two tiers of subscription: Standard ($60 per year) and Executive ($120 yearly). The latter comes with the added benefit of 2% cashback on all purchases throughout the year. A household that spends over $6,000 in a year easily earns back the membership fee from the cash rewards of the executive tier.
Costco typically raises its membership fees every five years. The last increase was in 2017. Although many consumers have both a Costco and Amazon Prime subscription, others may choose only one. The primary risk for Costco in raising membership fees is losing customers in response. For that reason, it helps that Amazon instituted an increase on Prime. Both tiers of Costco's membership are now priced below Amazon's, which could be a vital criterion for cost-conscious consumers.
What this could mean for investors
The timing of the hikes could work well for Amazon and Costco. Consumers are well aware of rising prices on everything from wages to shipping. When companies in similar industries follow each other in price increases, it's typically good news for investors. Of course, this comes at the expense of consumers, who will pay higher prices regardless of what they choose.
