Further Evidence That Amazon Could Raise the Price of Prime

Amazon (NASDAQ: AMZN) Prime membership in the United States is up by more than 50% over the last two years, according to estimates from Consumer Intelligence Research Partners (CIRP). After adding 30 million subscribers a year in both 2020 and 2021, 172 million Americans are now members of the program.

One of the more interesting findings from CIRP's surveys is that Amazon's subscriber retention rates are climbing: 94% of Prime customers renew after their first year, and 98% of those who have subscribed for two years renew for a third. That statistic suggests Amazon could raise its Prime membership rate once again.

A truck with the trailer painted with the Prime logo.

Image source: Amazon.

Rivals can't steal Prime's members away

Competition among subscription services like Prime has increased over the last few years. Walmart (NYSE: WMT) notably launched Walmart+ in the fall of 2020. That service's cornerstone is free grocery delivery from Walmart stores, and it also includes exclusive sales items, plus discounts on prescriptions and fuel.

Amazon has made a concerted effort to counter those offerings. It expanded grocery delivery from its Whole Foods grocery store chain, launched an online pharmacy and prescription savings program, and it's progressing again toward the goal of providing same-day and one-day shipping on millions of items.

Existing subscribers are quite pleased with Amazon Prime, as evidenced by its extremely high retention rates. By comparison, Walmart struggled to retain its earliest Walmart+ customers in early 2021, according to a leaked memo seen by Recode.

The lone sore spot for Amazon Prime in 2021 was that the conversion rate from its free-trial memberships into paid subscriptions fell. Less than two-thirds of trial members last year joined as paying members once those trials expired, down from nearly three-fourths in 2017. That may indicate that Prime membership is nearing a saturation point in the U.S., despite the massive number of new subscribers it added over the last two years. However, the decrease in trial conversions was offset by the higher retention rates.

Time for a price hike

Taken together, these statistics suggest that Amazon could raise its price for Prime without significantly impacting membership growth. And such an increase would be further justified by the expansion of the program's offerings in the four years since the last price hike. On top of that, another $20 price increase, like the ones it instituted in 2014 and 2018, would barely compensate for inflation at this point.

Assuming the two-thirds of U.S. adults subscribed to Prime (based on CIRP's data) equate to approximately two-thirds of U.S. households (or 80 million), a $20 price increase could add around $1.6 billion in annual revenue for Amazon. That revenue would flow straight to the bottom line, producing a significant impact on Amazon's earnings: $1.6 billion amounts to more than 5% of its operating income over the last 12 months.

Importantly, the company is now at a point where it can start moving back toward consistently providing the core benefit of Prime -- super-fast order fulfillment. Earlier in the pandemic, consumers drastically increased their use of e-commerce channels, stressing Amazon's warehouses and fulfillment infrastructure. Supply chain issues led to lots of items regularly going out of stock and long wait times for customers. As of the end of 2021's third quarter, management said Amazon is no longer constrained by warehouse capacity, but it still faces a labor shortage.

After hiring lots of new employees in the fourth quarter, Amazon may be exiting the era of capacity constraints. Its ability to fulfill orders quickly and get them to customers' doors within two days is improving. Before the pandemic, it was seeing an increase in order unit volume as Prime members bought items eligible for one-day shipping. That is to say, fast shipping is still of "prime" importance to members.

In 2022, Amazon is better positioned than it has been at any time in the past couple of years to boost the annual subscription price for Prime. And with a member base 50% larger than it was two years ago, doing so would produce a meaningful bump in this FAANG stock's earnings.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Levy owns Amazon. The Motley Fool owns and recommends Amazon. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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