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Amazon.com has over 100 million people subscribed to its Prime program, which offers free shipping, video viewing and a host of other perks for an annual fee of $99. Last week, Amazon announced that it was taking the price for an annual membership up to $119. Will Amazon’s legions of fans be willing to pony up $20 more a year to remain in Prime? Will the increase slow Amazon’s ability to attract new members to the program?
By George Anderson
On the company’s earnings call earlier in April, CFO Brian Olsavsky told analysts that the Prime program is a strong driver of Amazon’s top line growth.
“We continue to increase the value of Prime, including speed selection and digital entertainment options,” he said (via Seeking Alpha). “We’ve been expanding free same-day shipping and one-day options. And our two-day shipping, it’s now available on over 100 million items, up from 20 million as recently as 2014. And we continue to add digital benefits like Prime Video.”
Amazon shrugged off concerns about raising its annual Prime membership rate from $79 to $99 in 2014. At the time, Amazon had gone eight years between raising its subscription rate and most, even those who grumbled, justified the increase based on added benefits and the fee remaining just south of $100.
With its latest announcement, Amazon is essentially admitting that operating Prime is an expensive proposition for the company. In addition to expanded benefits, Amazon has invested heavily in expanding its own private fleet of delivery services. It is in the process of bringing Whole Foods into its package of benefits with free two-hour Prime Now deliveries in a growing number of markets.
Mr. Olsavsky said Amazon has a number of programs in place for individuals who may find paying $119 in one shot too much. He pointed to a monthly subscription option as well as discounted programs for students and other groups. In the end, he said, “We do feel it’s still the best deal in retail, and we just work to make it better and better each day.”
Amazon posted a net sales increase of 43 percent during the first quarter, while operating income rose 92 percent to $1.9 billion.
Discussion Questions: Do you expect Amazon to face reluctance from consumers to the increase in its annual Prime program rate? How do you expect Amazon rivals to react?
Comments from the RetailWire BrainTrust:
At $119 per year, Prime Membership is still a no-brainer. With the $20 price increase, Amazon is mostly charging for its dramatic improvement in membership benefits over the past year. But I think that there is also an acknowledgement that the retail business may be shifting out of hyper growth mode into just “regular growth” mode. The most interesting, undiscussed number in Amazon’s Q1 earnings is the 13 percent growth rate of online stores, down from 17 percent in Q4 and 22 percent in Q3.
Ken Cassar, Vice President, Principal Analyst, Slice Intelligence
People will complain, but I don’t think many will cancel their memberships. Amazon has us sucked in and we are used to two-day or Prime Now shipping. Collecting an extra $20 from the majority of subscribers will more than make up for the loss of any cancellations.
Meaghan Brophy, Managing Editor, Independent Retailer
No. We’ve all added it up, it was WAY too much of a bargain.
What’s more interesting about all of this though is the fact that the Amazon business model is really proving out, which could/should change the way companies think in the future. That model is: growth first at any cost/learn what works/boffo profits later. It takes guts, faith and amazing intuition to not want “tests” to be profitable, but that ’90s way of thinking obviously has to change.
Congrats to Amazon for proving the “profit doomers” wrong. Stay the course and keep showing us that new path.
Lee Peterson, EVP Brand, Strategy & Design, WD Partners
I think there’s a bigger story at play here — and that the opportunity for other retailers. Amazon is suddenly making huge profits. Has anyone asked why? Two reasons; it is no longer selling products at a lower price (beyond some minor 5 percent differences) and it is outsourcing its “Prime” offerings to third parties. In other words, the company is starting to think more like a retailer that has to make money.
So why is that good news? Retailers, ignore the Prime price increase and focus instead on the omnichannel investments you have made — as more and more third-party prime shipments get messed up (and, at least for me, they really do), you have an opportunity to shine. Search gets interesting. Being good at what you do suddenly matters. I can list some of the companies that will do really well. I can also list those who won’t, because they still don’t understand the need for speed.
I think retailers who operate well will do well. Better. This could be good.
Paula Rosenblum, Managing Partner, RSR Research
With free delivery with Prime, and the discounts that we take advantage of at Whole Foods, it is still a pretty good price/value proposition. For those that use it on a regular basis, as we do, it is still a good deal. Ask me when they raise the price again and I may have a different answer.
Zel Bianco, President, founder and CEO Interactive Edge
$99 is such a great amount from a psychological standpoint. Increasing by 20 percent is quite the jump, inflation wise. I don’t think it will go without grumbles and some attrition but, on the whole, it won’t do too much to hurt numbers.
Jennifer McDermott, Consumer Advocate, finder.com
We live in a nanosecond world where we expect instant gratification. Amazon Prime delivers on that expectation. An extra $20 will be absorbed quickly and quietly. I’d be surprised if Amazon lost more than 1 percent of their existing Prime customers. Don’t forget about Prime Video.
Adrian Weidmann, Principal, StoreStream Metrics, LLC
A 20 percent hike is difficult to overlook, unless you have completely weaved Amazon’s Prime-only services into your daily life. I suspect limited push back by some consumers but the true net effect might be a slowing down in membership growth rate rather than churn.
From a competitor perspective, the hike by Amazon may actually give competitors a green light to raise their own fees or at the very least provide a narrative for having such fees.
What Amazon has been doing for Prime members is to continually increase the value derived and ensure they personalize their communications to the particular savings and access to services that are most meaningful to each member. Amazon’s commitment to deepen and broaden their strategic moat keeps both competitors out and current customers in.
Mohamed Amer, Global Head of Strategic Communications, Consumer Industries, SAP
We’ve seen plenty of examples of membership services raising prices successfully, just look at Costco for one example. When the service provides real value, and there’s no question Prime subscribers find value in the suite of services, customers will pay. I expect there will be plenty of complaints on social media and in the mainstream media but, in the end, very few customers will drop their membership. Will it slow down adoption by new customers? Possibly, but I can’t imagine Amazon didn’t build a financial model to evaluate this and conclude the impact would be negligible.
Ricardo Belmar, Sr Director, Worldwide Enterprise Product Marketing, InfoVista
Amazon will not miss a beat. The value IS there. As with Costco (the membership program Jeff Bezos used as the model when he launched Prime) people now have an emotional attachment to Prime membership. Like Costco, Amazon Prime membership, at its current price points, remains for the most part inelastic, etc. Members might complain but few will cancel their Prime memberships.
Michael Day, CMO, Retail, Teradata
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