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Will Amazon's new $99 Prime subscription fee backfire?

Amazon raised Prime to $99 from $79, but a CIRP report shows many won't renew at that price point

Financial trends and news by Faith Merino
March 13, 2014 | Comments
Short URL: http://vator.tv/n/35a2

WWAAAAGGHH! Amazon! Y U do this to meee?!

“Faith, what’s with the net-speak rage?” you ask.

I’ll tell you what’s with the net-speak rage. Amazon announced Thursday morning that it is officially raising Prime membership prices by 25% to $99 a year, up from the $79 annual subscription fee that’s been a Prime constant for the last nine years.

So, after rereading that last paragraph, my net-speak internal rage monologue has simmered down a bit. Eh, what’s another $20 a year? I’ve spent more than that on items I ordered from Amazon that I ended up hating, but was too lazy to take to the post office to send back.

An Amazon spokesperson said that the price hike will go into effect March 20 for new users, but those who sign up for a free trial before that date can lock in the $79 rate for the first year. The price hike will take effect for existing users after April 17, on their annual renew date. 

“Even as fuel and transportation costs have increased, the price of Prime has remained the same for nine years,” the company said in an email to Prime subscribers. “Since 2005, the number of items eligible for unlimited free Two-Day Shipping has grown from one million to over 20 million. We also added unlimited access to over 40,000 movies and TV episodes with Prime Instant Video and a selection of over 500,000 books to borrow from the Kindle Owners' Lending Library.”

Prime membership has been growing at breakneck speed. A report from CIRP estimates that Prime members topped 26.9 million as of February, up from 16 million in September 2013. The company revealed that it added one million new Prime members in the week before Christmas alone—and even had to limit the number of new memberships it could give out due to high demand.

Morningstar analyst R.J. Hottovy has noted before that the $79 subscription fee is almost pure profit in Amazon’s pockets. While the company typically breaks even on sales and shipping costs, $78 of every $79 Prime subscription fee goes straight into Amazon’s pockets and accounts for one-third of Amazon’s consolidated segment operating income.

If the Prime subscriber base has remained constant at 27 million, then an extra $20 from each subscriber could potentially add an extra $540 million a year to Amazon’s profits. But that’s only if the Prime subscription base doesn’t backslide…

CIRP notes that while Prime has seen exponential growth in the last two years, it also sees a high rate of cancellations. Nearly a quarter of Amazon shoppers previously had a Prime membership that they didn’t renew. Of those, three-quarters chose not to renew because of the cost.

Among existing Prime members, 94% said they would probably or definitely renew their membership, according to a CIRP survey. Interestingly, however, at the $99 price point, just under half of respondents said they would probably or definitely renew. At the previously proposed $119 price point, a full 40% of respondents said they definitely would not renew.

So Amazon could potentially see a large-ish drop in new signups at the new $99 price point as everyone else’s net-speak rage blasts on. 

 

Image source: Mashable


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