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