On Thursday, March 13, Amazon announced they will raise the price of its Prime membership from $79 per year to $99 per year. Let’s use our Pragmatic Pricing framework to look more closely at this and to make a prediction.
First, Amazon Prime is a Will I? product. Buyers don’t say to themselves, “should I buy Prime or someone else’s free shipping program?” Instead, they simply ask themselves, “should I buy Prime or not?” Since buyers are much less price sensitive when making Will I? decisions, the price increase should not significantly detract from the rate at which Amazon signs up new customers. Emphasis on NEW customers. (See here for more on Will I? and Which one?) New customers don’t see a price increase. They only see the $99 price tag.
However, since Price is a recurring revenue stream (i.e. a recurring cost to current customers), customers will not like having their prices increased. Put yourself in the shoes of a Prime customer. Several years ago, you evaluated whether or not Prime would be good for you and you said yes to the Will I? decision. You paid $79 for the year. The next couple of years at renewal time, you already made the decision so you won’t spend much time reconsidering it. Now though, the price has increased. Now you are more likely to rethink whether or not Prime is still right for you.
One big disadvantage to price increases with recurring revenue streams is it motivates your customers to rethink their decision. Without the increase these decisions are often on auto-pilot.
However, notice how well Amazon mitigates the impact of the price increase. In the articles describing the increase (e.g. CNNMoney), Amazon blames the need for the price increase on increasing costs of shipping and fuel. Possibly the only excuse for raising prices that your current customers accept is increasing costs. Check.
Also, the article explains that they considered raising it by $40 to $119 but only raised it by half that amount. This makes the price increase feel like a discount. That’s impressive.
Prediction: Amazon will lose some Prime memberships over this, but probably less than 10%. However, the customers they lose will be the ones who receive the fewest shipments from Amazon. These customers get the least value from Prime, but they are also the least expensive for Amazon to serve. However, the revenue from the 25% price increase on the customers that stay will outweigh the loss of a few customers. Additionally this will not significantly slow down their rate of new customer capture. Sum it all up and this price increase will be a very profitable move for Amazon.