announced that it was raising the price of its Amazon Prime
service. The customer backlash was almost instant, with
satisfaction ratings for Amazon Prime customers dropping from 93%
Amazon Prime is a service offered through annual
subscriptions, a cost that is rising from $79 per year to $99.
Though the price hike of around 25% doesn't seem to be sitting
well with some customers, I am convinced that the
Amazon Prime price increase
is good for Amazon.
As it turns out, having money invested in the Prime membership
makes a big difference to customer habits. This logic is on full
display with the success of
, which charges annual memberships for the privilege to roam its
Amazon Prime customers spend more than double what non-Prime
customers spend on Amazon.com, with Prime users spending $1,340
annually compared to $650 spent by non-Prime customers.
Today, Prime membership gives customers unlimited 2-day
shipping, discounted 1-day shipping, access to a large library of
Amazon Kindle e-books plus access to Amazon's library of over
40,000 movies and TV show episodes.
Piper Jaffray analyst Gene Munster's consumer surveys suggest
that as many as 15% of Prime customers will drop the service in
the wake of the price increase.
Still, he maintains an "overweight" rating and a price target
of $420 per share, an increase of 12% over Monday's closing price
of $375. He also estimates the $20 price hike could amount to
$150 million in additional profit for Amazon in the first twelve
The justification for the Amazon Prime price increase is
The company instituted the $79 annual cost in 2005. Adjusted
for inflation, that initial $79 price is $96.06 in today's
dollars. But Amazon has kept this price flat at $79 until
Amazon also continues to add to its Prime Instant Video
library, a collection of content to which Prime members have
unlimited streaming access.
It is easier to compare the price of Amazon Prime to competing
services when you consider its monthly cost, as that is the
billing style of competitors. These competitors include
and Hulu Plus, which is controlled by a consortium of
costs $7.99 per month and gives users ad-free access to its
massive library of TV shows and movies.
Hulu Plus also costs $7.99 per month and gives users access
its smaller-than-Netflix library of primarily recent or
current-run episodes from TV shows. Hulu Plus is offered with
"limited advertising," meaning that user still see ads.
Amazon Prime will soon cost $99 per year, so $8.25 per month.
For that, users get ad-free access to a library of popular movies
and TV shows roughly half of Netflix's library.
But Amazon Prime users also get free 2-day shipping,
discounted 1-day shipping and free Kindle library lending. Surely
once-satisfied Amazon Prime users can still see the value in
Amazon will likely lose a small amount of customers as a
result of its price hike. But, Prime offers such strong value to
consumers that the service is likely to continue thriving. And
the additional $20 in revenue per user won't hurt either, with
the potential to significantly boost Amazon's bottom line.
I have no doubt that the Amazon Prime price increase is good
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