Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Here's the Good News and the Bad News on Amazon Prime's Price Hike

By Rich Smith - Mar 13, 2014 at 4:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Nine years in, Amazon Prime is better than ever. But soon, it will cost more than ever before, too.

If you haven't checked your email yet today, you're probably going to be in for a shock: Amazon.com ( AMZN -0.00% ) is raising prices on Amazon Prime.

Statistically speaking, you probably know what Amazon Prime provides. According to CEO Jeff Bezos, Prime members around the world now number in the "tens of millions." But just in case you're not one of those heretofore lucky souls who've benefited from the service, here's a quick rundown on Prime. 

An all-you-can-eat free delivery service
Since Bezos first started the project nine years ago, Amazon Prime has offered its members free two-day delivery of most goods sold on Amazon.com for anyone willing to pay $79 up front to subscribe to the service. Lifehacker.com estimates that an average consumer making as few as 10 orders from Amazon.com annually will at least break even by subscribing to Amazon Prime -- before considering the other benefits.

A virtual library
In addition to free delivery, Prime membership gives Amazon's customers the ability to "borrow" from a collection of more than 500,000 e-books. If you own a Kindle e-reader, Prime membership permits you to borrow a book a month from the Kindle Lending Library -- at no extra charge.

And a free streaming movie service
In direct competition with Netflix, Amazon has built up a library of 40,000 movies and television episodes that can be streamed to digital devices and televisions for free, with Prime membership.

There are other benefits to Prime, but these are the three biggies.

Now for the bad news: You know the $79 membership price that I mentioned up above? The one that's remained constant for the past nine years? Well, it's finally going up to $99.

This morning, Amazon sent out an email to all of its members explaining the increase as arising from several factors. Rising "fuel and transportation costs" are one factor. But also behind the increase are moves Amazon has made to make the Prime service more valuable -- and so worth more money to members. Expanding the borrowable Kindle e-book library and buying rights to all the movies streamable through Prime cost Amazon money. To continue making these improvements, Amazon needs to raise the cost of Prime.

What does it mean to you?
If you are a Prime member, the roughly 25% cost increase on Prime means that you need to make upward of about 12 orders on Prime to "break even" -- if the Kindle and streaming video services have no value to you. If they do have value, then you may break even earlier. A recent survey by UBS suggests that 58% of Amazon Prime members think they'll at least break even at Prime's new $99 price point.

If you are an Amazon.com shareholder, the dynamics are a bit different. Here, you need to weigh whether, in your estimation, Amazon will gain enough extra revenue from raising the price of Prime to offset the revenues lost from the loss of customers rebelling at the price hike. With the stock rising 1% so far in response to today's news, it appears most investors are calculating that Amazon will do so, and that raising the price of Prime is good news for them.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$3,523.16 (-0.00%) $0.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
652%
 
S&P 500 Returns
142%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/08/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.