Amazon plans Prime fee hike by $20, risks consumer wrath

A worker prepares an item for Amazon Prime delivery at Amazon's distribution center in Phoenix, Ariz., on Nov. 22, 2013.
RALPH D. FRESO | REUTERS
A worker prepares an item for Amazon Prime delivery at Amazon's distribution center in Phoenix, Ariz., on Nov. 22, 2013.
Posted March 13, 2014, at 2:43 p.m.

Amazon.com Inc. planned to hike the annual fee for its popular Prime service by $20 to $99 starting next week, a move announced Thursday that could deter potential customers and undermine a feature that has helped drive its business.

Amazon had warned of an increase of as much as $40 in January, citing rising fuel and transportation costs. The service, which offers unlimited two-day shipping among other perks, had cost $79 since its introduction in 2005.

The average Prime customer in North America spends at least twice as much as non-users, according to some analyst estimates. Analysts do not expect users to drop the service en masse, but one said it may temper its growth.

“We wonder if a meaningful price increase would dissuade some on-the-fence potential Amazon Primers from ponying up for the membership,” RBC Capital Markets analyst Mark Mahaney said in a research note.

Amazon considers Prime instrumental to boosting purchases of goods and digital media. Prime customers get a limited selection of book downloads and film and television streams as part of the service, which has helped expand its presence on mobile devices.

The company is facing pressure to show sustained bottom-line growth, following years of rapid revenue expansion at the cost of profits. Analysts estimated the price increase could add about a half billion dollars to annual operating income, assuming all of the more than 20 million Prime users in the United States keep their subscriptions.

“If you consider things like inflation and fuel costs, a Prime membership valued at $79 in 2005 would be worth more than $100 today,” Amazon spokeswoman Julie Law said.

Mahaney expected the move would drum up between $300 million and $400 million in added annual operating income, if between 1 percent and 5 percent of Prime users drop the service. This would add between 45 cents to 55 cents per share to earnings.

Amazon shares climbed about 1 percent to $374.31 at midday.

Some analysts said consumers tended to strongly resist online fee hikes, such as when Netflix Inc. tried in 2011 to raise its annual subscription fee by what it called “the price of a latte.” It backtracked after a customer revolt.

Some Amazon Prime customers responded quickly.

“I’m going to cancel: My thought is that the price should be going down. Prime customers order more from Amazon because of their membership,” Caryn Brooks wrote on a Facebook Inc. discussion moderated by Reuters. “By having Prime members they have more guaranteed sales … they should nurture those folks, not repel them.”

An analyst said the hike was expected and consumers would get accustomed to paying more.

“Based on our surveys of consumers, key reasons to shop on Amazon (and online more generally) include convenience, selection, and price comparisons,” R.W. Baird analyst Colin Sebastian wrote in a research note. “Prime helps to amplify the first two drivers.”

 

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