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What Amazon's Prime Price Hike Means for Investors

By Tamara Walsh - Mar 17, 2014 at 9:04AM

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Amazon raised the price of its annual Prime membership. Here's what the change means for long-term investors.

By now, you've heard that Amazon.com ( AMZN 2.80% ) officially increased the price of its Prime membership. Beginning April 17, it will cost $99 per year, up from $79, to be a Prime subscriber. This breaks down to about $1.67 of additional cost per month. Of course, the benefits haven't changed.

Being a Prime member still means unlimited free two-day shipping on millions of products, as well as unlimited video streaming of 40,000 moves and TV shows and access to free e-books from Amazon's Kindle Owners' Lending Library.

But what does this price increase means for investors?

Prime numbers
This move marks the first price increase since Amazon launched its Prime program nearly nine years ago. Nevertheless, the $20 price hike was on the low end of what the company was considering. Some Amazon shareholders were hoping for a $40 price hike, which would have brought the annual fee to $119. However, investors need to keep in mind that Amazon has always played by a customer-first strategy, and this time is no different.

In fact, customers get a lot more out of being Prime members today than ever before. For example, Amazon continues to increase the number of items eligible for Prime shipping -- it's up from just 1 million in 2005 to more than 20 million today. The world's biggest online retailer is also adding new content to its Prime video streaming service, including the new original series The Americans.

"We are working to expand selection even further, as we develop additional fulfillment and transportation capacity to make the Prime program even more valuable to our members," an Amazon rep confirmed to CNBC.

On top of this, Amazon is said to be working on a streaming music service that would rival Pandora. Throwing a music service into the mix would certainly raise the value proposition if it were to be included in Amazon Prime.

Cost and effect
Amazon hopes the price hike will help the company offset rising shipping costs. The online retailer's shipping expenses swelled 19% to $1.21 billion in its fiscal fourth quarter, as more people shopped on Amazon.com during the all-important holiday shopping period. Amazon reportedly has about 20 million users paying for its Prime service, which includes 1 million subscribers added during the third week of December.

The price hike could also lead Prime members to spend more (and more frequently) on Amazon.com in order to get the most out of their fees. Ballooning sales are certainly something every Amazon investor can be happy about. Even before this price increase, Prime members were often spending twice as much as non-Prime shoppers, according to research from Morningstar.

Ultimately, a modest $20 bump in price may be lower than some investors would have liked, but it also means existing Prime members will likely be more willing to renew their memberships despite having to pay more per year. Moreover, Amazon shouldn't have any problem adding new members to its Prime program in the future because the company continues to add new content and services to its Prime offerings.

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.

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