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Will an Amazon Prime Cost Increase Scare Away Customers?

By Daniel B. Kline – Mar 13, 2014 at 10:13AM

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Amazon has risked angering its best customers by raising the cost of its Prime service for the first time ever.

After nine years, (AMZN 3.10%) has decided to raise the price of its Prime service in the United States from $79 to $99.

The company announced the change in an email to Prime subscribers, which did not specify exactly why it was increasing the cost of the service. Instead the email focused on the fact that Amazon has not raised the price since the launch of the service in 2005 while greatly expanding the items covered by a membership.

Prime offers unlimited free two-day shipping to members on any items Amazon sells directly. It also includes free access to Prime Instant Video -- a sort of Netflix-light that includes movies, television shows, and a number of original programs.

The text of the email I received is as follows:

Dear Daniel B Kline, 

We are writing to provide you advance notice that the price of your Prime membership will be increasing. The annual rate will be $99 when your membership renews on July 26, 2014.

Even as fuel and transportation costs have increased, the price of Prime has remained the same for nine years. Since 2005, the number of items eligible for unlimited free Two-Day Shipping has grown from one million to over 20 million. We also added unlimited access to over 40,000 movies and TV episodes with Prime Instant Video and a selection of over 500,000 books to borrow from the Kindle Owners' Lending Library. 

For more information about your Prime membership, visit our Prime membership page.


The Amazon Prime Team

Will the price increase hurt Amazon?

In my earlier article Is Amazon Raising the Price for Prime?, I argued that Prime binds customers to Amazon and makes them more likely to shop with the online retailer. That argument is supported by market research firm Consumer Intelligence Research Partners, which in 2013 estimated Prime members may spend more than twice as much — $1,340 per year – than non-Prime members using Amazon, according to the Wall Street Journal.

Amazon does not release figures as to how many of its customers pay for Prime, but CEO Jeff Bezos gave a broad answer after the 2013 holiday season. 

"Amazon Prime membership continues to grow, and we now have tens of millions of members worldwide," The New York Times reported.

That does not answer how many Prime customers Amazon has but it suggests it's north of 20 million. It also does not break down how many of those are in the U.S., but Amazon did over $44 billion in sales in North America in 2013 and another almost $30 billion internationally. If Prime memberships break roughly along those lines, you could logically assume the company has at least 12 million Prime subscribers in the U.S.

Admittedly that's a very crude calculation but if those numbers are anywhere near accurate Amazon runs a risk that if the price increase causes Prime members to cancel, it could turn 12 million customers who spend an average of $1,340 a year into ones that spend $670.

Will people drop Prime?

Prime customers spend a lot of money with Amazon and by raising the price for the service the company risks angering its best customers. 

Mark Rogowsky writes about Amazon for Forbes and he addressed the risk to Amazon in a column that was posted right after the increase was announced.

"Prime becomes a habit, leading to much higher spending with Amazon," he wrote. "The company is basically concluding that it will collect $20 extra from everyone and lose virtually no Amazon orders from anyone. If even a few percent of customers drop Prime and place even slightly fewer orders through the year, Amazon might end up losing out on enough gross margin to negate whatever benefit the extra $20 per remaining Prime customer brings."

Forbes also reported earlier this year a note from UBS analyst Eric Sheridan, in which he wrote that most Amazon users were happy with service and 94% of customers indicated they "definitely will renew" or "probably will renew" at a $79 annual fee. But if the price were to increase the survey showed larger numbers of people will abandon it.

"Cost is the number one reason customers cite when not renewing their Prime membership. At $20 or $40 price increases [the range suggested by Amazon in its latest earnings call], the percentage of people who said they would renew the service dropped to 58% and 24% respectively," he wrote. 

By that math, in raising the price $20, Amazon risks losing 36% of its Prime subscriber base who otherwise would have renewed, if respondents follow through on their stated intentions.

What will Prime subscribers do?

People threatening to not renew and people actually not renewing are two different things. Even the most ardent opponent of price increases has to acknowledge that Amazon could have inched costs up every year, and has held the line for a remarkably long time. During that period gas prices have risen and Amazon certainly had the justification it needed for the increase.

Working against Amazon is the fact that in 2005 digital books were not a thing, making free two-day delivery for people who bought books (once Amazon's key item) a huge perk. Now with digital books outselling traditional print titles, the benefits of free delivery may have diminished for some Amazon customers.

Still many Prime customers who began by buying books likely took advantage of free delivery to order everything from groceries to electronics and clothes from Amazon. Many of those people also use Prime Instant Video. And while the increase may give them pause a mass defection seems unlikely.

The biggest reason for that may be the magic words that have kept people as members of gyms they don't use for years -- auto-renew. Though Amazon does send an email warning of the impending renewal, Prime memberships auto-renew. Many people simply won't -- no matter how angry they are at the price increase now -- bother to take the steps to cancel it. Twenty dollars is simply not that much and the increase is easy for Amazon customers to justify in a way that will make Amazon executives smile: "If I pay more for it, I better use it more."

This move may elicit short-term anger from Prime subscribers but in the long run most should stay in the Amazon fold.

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Daniel Kline has no position in any stocks mentioned. He is an Amazon Prime member and intends to renew. The Motley Fool recommends The Motley Fool owns shares of 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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