How elastic is Amazon Prime’s subscription price?

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Discussion
Feb 03, 2014

On a conference call last week with analysts, Amazon officials indicated they were exploring raising the price of Prime, its $79 yearly subscription service that includes free two-day shipping.

The price may rise between $20 to $40 for members in the U.S., although the company gave no time frame for when the hike might occur. The price of Prime hasn’t changed since it first launched nine years ago.

The higher use of Prime two-day shipping and "the increased cost of fuel and transportation" were factors in considering raising the membership price. New services to Prime, like streaming video, were also making the program more costly to operate.

"We know the customers love Prime as the usage of the shipping benefit has increased dramatically since launch," said Tom Szkutak, Amazon’s CFO, on the call. "On a per customer basis, Prime members are ordering more items across more categories with free two-day shipping than ever before."

Amazon said it had more than 20 million subscribers in December and many analysts estimate they spend about twice as much as nonmembers. The service, which also offers discounts on some services like same-day delivery, now covers over 90 million items.

The discussion around raising Prime’s subscriber fee came as Amazon’s shares slumped 9.1 percent Friday after the company posted a fourth-quarter profit that missed analysts’ estimates and warned about a possible operating loss in the current quarter. Sales in the holiday quarter rose 20 percent, its slowest rate since 2008 and down from 24 percent in the third quarter.

"They have gotten a lot of hall passes on profitability; maybe that run is over," Colin Gillis, a BGC Partners, told The Wall Street Journal.

Some analysts saw the risk of alienating existing customers or discouraging new ones by raising the cost of Prime membership. Expectations would also be higher for a costlier service.

But other analysts said much depends on how the Prime fee would be structured, with tiered levels expected. Amazon is also counting on the loyalty of existing members.

"They don’t think they will lose customers," Gene Munster, an analyst with Piper Jaffray, told The New York Times. "They are doing this from a position of strength."

To what degree would raising the price of Prime alienate existing members and discourage new ones? How should Amazon structure a possible price increase?

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21 Comments on "How elastic is Amazon Prime’s subscription price?"

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Matt Schmitt
BrainTrust

Amazon’s comments on the reasons for a price hike were directed primarily at increased costs of shipping. What has not been widely reported is the fact that Amazon has been slowly moving beyond free shipping as the only benefit to Prime membership. Prime members now get access to an growing library of streaming media including movies and TV shows. Amazon seems to be leveraging Prime membership to fund their assault on Netflix.

So, will Prime members accept increases in fees to fund more benefits beyond just free shipping? Amazon will likely gauge response and determine whether or not they will need to break Prime membership into tiers based on services and benefits.

Jason Goldberg
BrainTrust

I don’t think a $20 – $40 increase will cause significant defections for Amazon Prime, but I do think it will dramatically slow the rate of new subscribers.

For those that have become addicted to Prime, and changed their shopping behavior, $20-$40 won’t seem like a significant investment to maintain their new lifestyle.

But for people who have yet to try Prime, and thus currently buy less frequently on the web. $100+ will seem like a steep price to pay to try a new shopping model. Adding an extra digit to the price is cognitively a significant step up.

If the price does go up, don’t be surprised if we see Amazon offering more promotional and trial memberships to entice new subscribers.

An interesting side note is that Prime is different things to different people. Many buy prime for the shipping and get the streaming video for free. But some customers do overtly buy prime at least in part for the video service. It’s pretty tough to explain to those customers that their membership fee is going up because of rising gas prices.

Liz Crawford
BrainTrust

When it comes to membership pricing – tiered privileges rule. Amazon needs a good, better, best pricing and benefits scheme to capitalize each segment of the market. Why leave anyone or anything on the table? Flank the offering with high and low tiers.

Max Goldberg
BrainTrust

Raising the price of Prime will alienate some customers, particularly those who order infrequently. If they must raise the price, Amazon could justify this by pointing out that the price of Prime has not increased since it was first offered.

To make a price increase more palatable, Amazon could throw in some additional benefits, creating more perceived value. Or they could tier pricing based on how quickly consumers wants to receive their purchases and offer one, two and three day delivery.

One thing Amazon should not do is pay too much attention to Wall Street. Bezos and company built a business that has consistently defied conventional wisdom. Now is not the time to be running with that herd.

Peter Fader
BrainTrust

Why focus on a single price? Amazon should develop different levels of the program and let customers self-select. Then Amazon could experiment with the service offerings (and, to some extent, the prices) to maximize profitability and customer engagement.

Steve Montgomery
BrainTrust

Admittedly while not a Prime user, I believe Amazon could raise the price $20 without having too large an impact on membership (current and future). Simply by joining, Prime customers are indicating that they like shopping on Amazon and inclined to do so. For most the additional $20 is not going to be a deterrent.

The real issue is finding a price point that keeps low use customers in Prime to subsidize the cost of shipping for those that use it a lot. Not crossing the $100 line should accomplish that.

Bill Davis
BrainTrust

A $20 to $40 price increase seems a bit high. I could see a $10 price increase not impacting current members greatly, but what’s being suggested seems a bit much. A $10 price increase would amount to $200+mm in revenue assuming minimal/no loss of its 20+mm members.

And breaking out the streaming video into its own service might be worth considering as well.

David Dorf
BrainTrust

If they stay under the psychological barrier of $100, there won’t be much of an impact. Over $99 and they’ll lose subscribers but still do well. From what I’ve seen, Prime subscribers are pretty faithful.

Robert DiPietro
BrainTrust

I think a $20 price increase will have little impact on acquiring new members or spiking cancellations of existing members. The benefits go beyond free shipping with access to content, etc. Although I assume the the shipping component is the clear cost driver but with multiple DCs, Amazon will cut down on the distance and cost of delivery.

No impact at $20, more of a risk at a $40 increase.

Jeff Hall
BrainTrust

Having been a Prime member for the past three years, the current $79 fee seems like a bargain. I’d easily pay $20 or $30 more annually and still feel that it is a great value.

In speaking with others who’ve been Prime members for a couple of years or longer, there is consensus in willingness to pay more. Amazon could do a better job of creating awareness as to the newer content offerings available to Prime members.

Andy Casey
Guest
Andy Casey
2 years 5 months ago

Personally, a $20 (25%) increase would likely cause me to drop the service even though I adopted it when it first came out and still love it. The effect would be to re-introduce shipping cost into decisions on where to buy and I would likely simply drop it to compare costs in the short term. If I found my shipping costs were going to exceed a membership cost, I would simply take advantage of the promotional memberships Amazon would likely be offering to gather new members.

Gene Detroyer
BrainTrust

The only subscribers they will lose are the ones that don’t count. Prime just keeps getting better and better with their offerings. It amazes me that they haven’t raised their price so far. $99 is a no brainer. More than that will take 5 minutes of thought.

Mike Osorio
Guest
Mike Osorio
2 years 5 months ago

This discussion is pure conjecture. Amazon has proven to be extraordinary at creating marketing models to entice usage and connect shopping behaviors to likely purchases. Similarly, I expect Amazon to use their vast data to ensure a pricing model for Prime that neither alienates existing users, nor keeps them from attracting more. I expect we’ll see a tiered pricing/services model – but who knows? They may choose to keep the simplicity of a one-price model and set it at a level that meets their operating margin needs.

Michelle Marian
Guest
Michelle Marian
2 years 5 months ago

Amazon does a great job of testing incrementally and rolling out wins. The Prime service was deemed very successful for Amazon and these subscribers are very loyal. A Prime price increase will have minimal impact on existing members.

Continuing to add value to their Prime service (Prime Instant Video) positions them to attract new customers.

Erik Lakvold
Guest
Erik Lakvold
2 years 5 months ago
There are two additional issues that need to be discussed. The first is whether or not the analysts were correct in their assessment to “punish” Amazon over its business practices. The second is part of the customer alienation question; even if the customer stays will they spend as much as they did before? The first question can be answered by whether or not the analysts care about long-term success of the company. If Amazon is covering all of its variable costs today and all of its fixed costs tomorrow, while still growing its customer base, gross revenue, and gross profit at healthy rates and limiting the growth of expenses to not exceed that of revenue, why should Amazon’s business model be looked at unfavorably? The second question will take time to answer. With median income declining steadily since 2007 and real unemployment still hovering around 13%, consumers across the nation are still wary of spending money. Their outlook might have improved but that doesn’t mean they are parting with their money more easily. Across retail customers still have the same number of units, or slightly less, but are spending more because the cost of the products has increased. With customers… Read more »
Phil Rubin
BrainTrust
2 years 5 months ago

Amazon can raise the price of Prime with relative immunity to concerns around elasticity. They are continually adding benefits and value to the membership and they do an exceptionally good job merchandising the program throughout the customer experience. It’s actually surprising that they’ve waited so long to raise the fee.

Frank Poole
Guest
2 years 5 months ago

Amazon increasingly charges a premium for products that are “Prime Eligible.” Many are less expensive from other sellers, and once you factor in the cost of shipping (which from other sellers is additional), and the state tax that Amazon is starting to charge, the only benefit Prime offers for those products is the 2-day angle. So how badly do you need those batteries?

My point is that I’m starting to apply the same type of thinking to my Prime purchases that membership was supposed to obviate.

Tiered pricing will only complicated things further. It might never be cheaper to join Netflix and Costco, but at some point it becomes reassuringly easier to think about.

Peter Charness
BrainTrust

I think they can raise the price of prime with maybe a bump in the road that people will soon forget (Anyone still mad at Netflix for their price changes?). I do think, however, that the price of a prime eligible product will have to stay closer to the price that a market partner charges pre shipping charges. Seems to me that you pay twice for prime, once annually, and once more in that many products that are prime eligible seem to cost about a shipping charge more than the same product from a non prime vendor.

Carol Spieckerman
BrainTrust

Raising the cost of Prime membership could have another beneficial outcome for Amazon that hasn’t been mentioned: people buying more goods in order to “justify” the increase. I may or may not be someone who would do something like that. 😉

Lance Thornswood
BrainTrust
The price elasticity of a Prime membership will be based on customers’ perceived value, of course. At $79/year this seems like a relatively simple decision for someone who buys a handful of times per year, uses Prime Instant Video and maybe borrows a few Kindle titles. The emotional arithmetic goes like this: 80 bucks divided by 12 months is just under 7 bucks per month seems like a good deal for free shipping and videos (BTW, nobody seems to talk about the Kindle book borrowing; I guess we don’t care about this one very much). At around $7/mo, that’s less expensive than Netflix, so it’s a no-brainer if you’re a light-to-moderate viewer of streaming video. I believe if the price rises to exceed the monthly Netflix charge, people will reconsider. They may not leave Amazon, but they will pause to compare whether it’s still the good deal they were getting before a price hike. I believe Amazon could soften the impact by letting all us subscribers know how much value we’re getting from our Prime subscriptions. At least, they could personalize and let those customers who are receiving “high value” know what a deal they’re getting: * Your subscription costs… Read more »
M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
2 years 5 months ago

What a coincidence. I cancelled my Amazon Prime membership over the weekend. I buy a lot of stuff through Amazon, and the old Prime price represented a savings on shipping for me. But not the new proposed rate. I haven’t used any of the ancillary services included in Prime membership because they don’t interest me. Prime undoubtedly is a benefit to millions of shoppers, but how many of them actually calculate how much they save? Perhaps that’s an additional Prime service Amazon could offer – an annual accounting of each member’s savings.

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