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

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

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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: (AMZN -0.47%) 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 for anyone willing to pay $79 up front to subscribe to the service. estimates that an average consumer making as few as 10 orders from 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 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.

Rich Smith has no position in any stocks mentioned. The Motley Fool recommends and owns shares of and Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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