How elastic is Amazon Prime’s subscription price?
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."
- Amazon considering raising Prime membership price – Bloomberg News
- Amazon’s Revenue Surges But Disappoints – The Wall Street Journal (sub required)
- Amazon warns of possible loss, mulls Prime fee-hike – Reuters
- Amazon to Raise Fees as Revenue Disappoints – The New York Times
- Amazon looks at boosting Prime fee, as earnings miss – The Seattle Times (tiered sub.)
Discussion Questions
To what degree would raising the price of Prime alienate existing members and discourage new ones? How should Amazon structure a possible price increase?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 decreasing their basket size Amazon might preserve the share of wallet, but what has happened to the share of mind? The increase will also create a greater barrier for new subscribers as other answers suggested.
Only time will tell the total cost of this change but at the end of the day, it’s not the economics that are dictating the change but an “analyst” that has the ulterior motive to profit from the stock price.
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.
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.
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.
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. 😉
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 $79/year
* You’ve received $68 in free shipping + 12 months of streaming video (compare to Netflix or Hulu Plus at $96/year) + 4 Kindle books borrowed for a savings of $54 (compared to their purchase price)
* Amazon Prime gave you $218 in value for just $79.
Reinforce that value-received message a few times and most folks won’t balk at a modest rate increase.
A few more recommendations for Amazon:
* Do a phased increase rather than a 50% rate hike overnight
* Test various rates to get an accurate measure of elasticity — easily done with all the customer behavioral data at Amazon’s disposal
* Test a monthly rate rather than an annual one to emphasize the value compared with Netflix and Hulu Plus (and to lower the perception of being “locked in” for a year)
* Consider personalized pricing based on the value customers are already receiving people who order frequently may find a higher price to be a good deal while infrequent buyers may be more sensitive to a rate hike
* Validate whether the payment of a Prime subscription increases customer propensity to buy from Amazon so they can maximize the value of the subscription fee — then weigh the elasticity risk against this increased purchase propensity. That calculus could help find the ideal sweet spot where Prime subscription cost balances perfectly with increased purchase volume.
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.