Amazon is primed for a price increase
In last week’s analyst call, Amazon executives noted they were considering a price increase of up to 50% for their popular Amazon Prime subscription service. This paid “loyalty program” offers subscribers:
- Free two-day shipping on millions of items
- Unlimited instant streaming of 41,000 movies and TV episodes
- Over 350,000 Kindle titles to borrow for free
It’s been a hot news item in the popular press and in the retail industry, but is it a big deal?
The price elasticity of a Prime membership will be based on customers’ perceived value, of course. At $79/year this seems like a relatively simple decision for someone who buys a handful of times per year, uses Prime Instant Video and maybe borrows a few Kindle titles. The emotional arithmetic goes like this: 80 bucks divided by 12 months is just under 7 bucks per month seems like a good deal for free shipping and videos (BTW, nobody seems to talk about the Kindle book borrowing; I guess we don’t care about this one very much).
At around $7/mo, that’s less expensive than Netflix, so it’s a no-brainer if you’re a light-to-moderate viewer of streaming video. I believe if the price rises to exceed the monthly Netflix charge, people will reconsider. They may not leave Amazon, but they will pause to compare whether it’s still the good deal they were getting before a price hike.
I believe Amazon could soften the impact by letting all us subscribers know how much value we’re getting from our Prime subscriptions. At least, they could personalize and let those customers who are receiving “high value” know what a deal they’re getting:
- Your subscription costs $79/year
- You’ve received $68 in free shipping + 12 months of streaming video (compare to Netflix or Hulu Plus at $96/year) + 4 Kindle books borrowed for a savings of $54 (compared to their purchase price)
- Amazon Prime gave you $218 in value for just $79.
Reinforce that value-received message a few times and most folks won’t balk at a modest rate increase.
A few more recommendations for Amazon:
- Do a phased increase rather than a 50% rate hike overnight
- Test various rates to get an accurate measure of elasticity — easily done with all the customer behavioral data at Amazon’s disposal
- Test a monthly rate rather than an annual one to emphasize the value compared with Netflix and Hulu Plus (and to lower the perception of being “locked in” for a year)
- Consider personalized pricing based on the value customers are already receiving people who order frequently may find a higher price to be a good deal while infrequent buyers may be more sensitive to a rate hike
- Validate whether the payment of a Prime subscription increases customer propensity to buy from Amazon so they can maximize the value of the subscription fee — then weigh the elasticity risk against this increased purchase propensity. That calculus could help find the ideal sweet spot where Prime subscription cost balances perfectly with increased purchase volume.
See my comments and others from the RetailWire Brain Trust on RetailWire.com