The Real Reasons Behind The Amazon Prime Monthly Price Boost

source: nyfa edu

It’s no secret that the e-commerce business of Amazon (AMZN) is driven by its Amazon Price subscribers, who spend about double the amount on products served up by Amazon than non-subscribers do.

So when it announced it has boosted its monthly subscriber price from $10.99 to $12.99 for Prime members, and from $5.49 to $6.49 for students, it definitely warrants a look as to what is probably behind the move, which goes into effect on the first payment after February 18.

The new annual costs from the monthly increase will climb from $131.88 a year to $155.88 a year.

It’s important to know that in both increases, the annual fee of $99 for regular customers, and $49 for students, remain the same. This at least partially plays into the reasoning behind the decision.

Also of note, the standalone service fee for its Prime Video membership remains the same at $8.99.

In this article we’ll look at what Amazon is trying to get out of the increase in monthly Prime subscription prices.

Prime growth

While Amazon has never released specific numbers concerning the number of customers subscribing to Prime, the general consensus is that in the U.S. there are about 90 million households subscribing. Again, those subscribers spend about twice as much as customers that don’t subscribe.

Growth for the service has continued to accelerate. In January 2018, the company said “more new paid members joined Prime worldwide this year than any previous year.”

As for the pricing, an Amazon spokeswoman said it was increased because of the “tremendous appetite” Prime subscribers have for the benefits offered in the service, adding, the company is “indifferent” to what payment option customers choose.

I’m going to challenge that assertion a little later in the article. First, let’s look at the variables associated with potential churn.

Thoughts on churn

Some concerns have been raised, and have been for some time, regarding how customers would respond once Amazon inevitably raised its Prime subscription price as the costs of delivering desired services increased.

It has to be kept in mind that Amazon’s performance is driven by Prime subscribers, so when it raised its monthly price, it had to know there was little risk to that customer base in regard to churn.

The first and probably most important thing to consider about the monthly price increase is, if customers were to cancel their subscriptions over $2 a month, or $24 a year, they aren’t the type of customer Amazon is trying to reach with the service in the first place. If they aren’t spending on average like other Prime subscribers do, they are costing the company money to retain them.

So while it’s probable there will be some churn as a result of the increase in subscription price on a monthly basis, it’ll almost certainly be customers that aren’t generating much in the way of e-commerce sales for the company. If its inner data didn’t confirm that, it never would have made the move in the first place.

What’s most interesting about the price move to me is the widening gap between the monthly costs and annual costs, which are now over 50 percent more. I think that’s the key to understanding what’s behind the decision.

I see Amazon trying to change subscribers’ behavior by making it much more desirable to choose an annual subscription against a monthly subscription. Why that’s the case is that it provides more visibility, continuity, and predictability to the performance of the company over time.

The reason why is that the company without a doubt has good customers that pay on a monthly basis. The problem is that with such a large customer base, numerous things can happen that can prompt a quality individual customer to stop their subscription. It could be a loss of a job, divorce, medical bills, or any other unplanned event that causes customers to rethink their financial priorities.

Getting them on an annual payment plan removes much of that risk. That’s because there is no reason to cancel a subscription if it isn’t due for some time. It provides a window of opportunity for the problem to be solved or adjusted to, which removes the level of churn of the types of customers Amazon wants to retain.

Finally, for those that decide to remain on a monthly pay plan, they will probably be good customers that will now provide a larger passive revenue stream with the company doing little to generate the increase in sales.

Most of the churn will come from customers that aren’t contributing much if anything to its bottom line.

Why how people subscribe matter

Now back to the assertion made by the Amazon spokeswoman. The reason I don’t think it’s an accurate statement is because it does in fact matter how people subscribe, and with the widening costs between monthly and annual costs, it is obvious to me the company is trying to push people to buy annually.

If I’m accurate in that assessment, it means the reason for the price increase isn’t to support the added services and their costs, but to get more people to grab a yearly subscription.

Why won’t Amazon come right out and say that? That’s easy. It would be a public relations nightmare for the company to declare some of its Prime subscribers aren’t carrying their weight because they don’t buy many products from the company to offset the costs of delivering premium services.

Conclusion

The costs of delivering premium services to Amazon Prime members are rising. Since Amazon chose to boost costs by targeting the monthly subscription, it suggests it is attempting to push monthly subscribers to its annual subscription plan.

Why it is doing that is in order to produce more predictable results, and in fact, lower churn. The annual service experiences little churn; the churn comes primarily from its monthly service.

So the combination of low-spend customers and an increase in annual revenue and earnings visibility are the primary catalysts behind this increase in monthly prices, in my view.

When considering Amazon will likely lose some fee revenue from this move, it’s obvious to me the company does care about how customers pay. What isn’t being said is that those that drop the plan altogether will no longer be Amazon customers.

What will be left is a better mix of monthly and annual customers, with the monthly customers being those that still spend significantly on its e-commerce platform.

From that point of view, Amazon will get an increase in monthly fees while keeping its best customers on board. That should more than offset the churn coming from the loss of lower-spending customers that are a drag on the service.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Carol Humphreys