Amazon is hiking the price of the Amazon Prime subscription service for the first time since it launched nine years ago.
Members will have to pay US$99 for their subscription instead of $79. Amazon Student members will pay $49 for the service.
Those who subscribe to Amazon Prime get unlimited two-day shipping on eligible items, access to the company’s streaming video library Prime Instant Video (in select regions), and the option to borrow books from the Kindle Owners’ Lending Library.
Subscribers to Amazon Fresh — an online grocery delivery service with availability in Seattle, San Francisco and Los Angeles — will still pay $299. Amazon Prime is included in that service.
Prime initially launched as a premium service for consumers hoping to receive their goods more quickly. However, the company added extra value over time making the Kindle lending library and streaming TV and movies available without additional cost to users.
Beyond generating extra profit, there are other reasons Amazon might want to increase the Prime price.
“Gas prices are at an all-time high. If you are [making those two-day deliveries], you have to factor in that the gasoline prices are through the roof,” Trip Chowdhry, managing director of equity research at Global Equities Research, told the E-Commerce Times.
Another thing to factor in is the unlimited streaming of videos and movies that’s part of the Prime deal.
“I think it’s just part of cost mitigation that they have increased the price,” Chowdhry said.
“Amazon has stated that the fee increase was introduced in order to cover fuel and transportation costs, but I think it’s more likely this is an attempt to offset the cost of its free two-day shipping,” said Amine Khechfe, general manager and cofounder of Endicia.
“As everyone knows, free shipping isn’t free — it comes at a cost to the vendor. However, customers want it more and more. In fact, a recent Endicia survey found that free shipping is the No. 1 factor behind a purchasing decision,” he told the E-Commerce Times.
“Amazon is getting smart about its free shipping,” Khechfe continued. “Over the holiday season, they raised the minimum purchase amount from $25 to $35 for customers to qualify for free shipping. They are realizing that they cannot sustain a free model anymore, and — with Prime’s popularity soaring — something needs to change.”
Reinvesting for Success
Amazon routinely reinvests revenue into its services and infrastructure, along with maintaining low prices, which leads it to have lower net profit than it conceivably could attain. In the three months prior to Dec. 31, Amazon saw gross revenue of $25.6 billion, but just $240 million of net income.
It’s possible that Amazon could use the additional revenue from Amazon Prime, which could be as much as $460 million, given an estimated 23 million Prime members, to reinvest in Amazon services. The company is testing deliveries by drone, for instance, providing Sunday deliveries, and expanding its slate of original content on Prime Instant Video.
Some customers may not be too happy with the increase and decide to quit Prime, but others will view the extra cost as justifiable.
“If customers like [the service], they will stick with it,” Global Equities Research’s Chowdhry said.
“The price increase is not that substantial at all, considering the fact that if you’re a Prime subscriber, you are at least spending more than $1,000 – probably close to $2,000 — a year. I think there will be some customers that they may lose, but overall it will be good,” he predicted.
“People are on Prime because they value things, and they have increased the value of the service. If you increase the value of the service, customers will usually pay for the increased value,” added Chowdhry.
‘Taking a Toll’
“Prime members certainly see the value in the service — so to an extent, yes, Amazon is able to make this move without overwhelming backlash, but I also believe that the increasing cost of shipping is taking a toll on Amazon’s bottom line,” Endicia’s Khechfe maintained.
“Transferring items from one location to another will always come at a cost, so it’s important for vendors to understand how to optimize their shipping mix,” he suggested. “As long as Amazon continues to prioritize offering cutting-edge services and seamless, convenient customer service, consumers and investors will tolerate the price increase.”