After floating the idea that it might raise the fee for Prime shipping to $119 from the current $79, Amazon settled on a $20 increase, to $99 per year. In states where Amazon collects sales tax, the fee will be over $100 because Amazon charges sales tax on the service. The increase becomes effective for those signing up as new subscribers on March 20 and on April 17 for renewing subscribers. This is the first price increase since the service launched in 2005. The special student price increases from $39 to $49. Amazon announced the increase to it subscribers via email messages.
Why Did Amazon Increase the Fee?
Amazon could add $500 million to its bottom line if it does not lose too many customers. It needs this revenue because of its thin margins. Despite the fee increase, shipping will still be a net loss for the company. Brokerage service BGC analyst Colin Gillis wrote in a research note, ” The shipping losses the company incurs to help drive revenue remain a barrier to profitability…Shipping losses are growing at approximately 23% YoY [year over year], and the losses were approximately 2x the shipping revenue in the December quarter….Even if shipping revenue in the most recent quarter increased 40% to $1.59 billion, shipping losses would still be 47% greater than the losses.”
Most orders over $35 will continue to be eligible for free shipping for people who do not belong to the Prime program. However, Prime includes much more than just shipping. Since starting the subscription service, Amazon has added unlimited access to over 40,000 movies and TV episodes via Prime Instant Video. It also provides access to more than 500,000 books for borrowing from the Kindle Owners’ Lending Library. To placate customers who may consider leaving because of the fee hike, Amazon is likely to soon roll out a streaming music service similar to Apple’s iTunes Radio. And over the past few years, the company has hinted that it is working on a set-top television box to compete with Roku.
Wall Street Reaction
As the increase became public on the morning of May 13, the stock rose to its second highest value this year, $382. However, by day’s end the stock had fallen to $371. The analyst community is split on whether this is an increase that loyal Prime customers will be willing to absorb or if customers will leave the program in droves. One competitor jumped into the fray quickly. On the same day Amazon revealed the fee increase, online merchant ShopRunner announced its intention to lure Amazon Prime customers by offering a free one-year membership to its own $79 shipping service. (See “Amazon Prime, ShopRunner Forcing Faster Free Shipping,” our article last Fall, for more.)
Analysts state that Prime members spend twice as much as other Amazon shoppers, well over $1,200 a year. Those Amazon customers who are interested only in free shipping and not streaming entertainment or Kindle books may be more willing to leave the Prime service and take their chances with free shipping on orders over $35. While Amazon has never revealed how many Prime subscribers it has, analyst estimates put the number at 20 to 25 million.
Third Party Sellers
On the Amazon Sellers’ Forum, Amazon Marketplace sellers have discussed the potential price increase for months. Some believe that they will lose customers as a result of the increase as people abandon Prime. But others expect most customers to take the increase in stride. It turns out that sellers are enthusiastic customers on Amazon as well as sellers and one said, “I did the math on my hard good orders for 2013 the other day. I paid .13 per shipment via Prime for shipping. I wasn’t kidding when I said I buy almost everything on Amazon.”
It will be difficult to determine if Amazon loses Prime subscribers because the company does not report membership figures. The company is betting that those who are in the habit of buying frequently on Amazon may find it difficult to kick the habit.