If Amazon Raises 'Prime' Prices, Most of Us Say We'll Leave

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Amazon Fox
Associated Press
As you've probably heard by now, Amazon.com (AMZN) is planning to raise the price of its popular "Amazon Prime" two-day free-delivery package program -- but the natives are getting restless.

A new proprietary Amazon Prime price survey just released by investment banker UBS (UBS) found that Amazon Prime members expressed great fondness for Amazon and "Prime." And, at the service's current price of just $79 for "all-you-can-eat" free delivery, 94 percent of Amazon Prime members told UBS's survey company, Consumer Intelligence Research Partners, that they intend to continue subscribing to the service.

That's all well and good, except that Amazon may not keep the price at $79.

Amazon's management points out it has held the price of Prime constant for nine years, even as inflation has marched relentlessly on, delivery costs have risen, and new features have been added.

Result: Amazon is struggling to make a profit in the face of rising costs. Shippers like UPS (UPS) and FedEx (FDX) push through 5 percent-ish price increases every year, year after year, pretty much without fail -- and even the USPS has been raising prices lately. Add in the cost of building a library of content licenses to stream media for free through its Amazon Prime Instant Video service (which comes bundled with Prime package delivery) and what you get is a very popular company, offering very popular services -- but earning a negligible 0.4 percent profit margin.

Which Price is Right?

To goose that profit margin a bit, Amazon told analysts listening in to its Q4 earnings conference call that it's weighing the option of raising the cost of Prime -- maybe just $20 to $99, or maybe as much as $40, to $119 per year.

If Amazon proceeds with this plan, though, UBS warns that it could face an exodus of Prime users.

As UBS's poll shows, nearly all Prime users like things just the way they are. But if Amazon raises prices to $99, 42 percent of Amazon users today say they will cancel their memberships. A price hike to $119, meanwhile, could result in more than three out of four current members (76 percent) abandoning the service.

Reviewing the results of its survey, UBS pronounced itself "surprised" at the fickleness of Amazon Prime members: "Our survey results call into question our prior views about the value that a broad set of consumers are applying to the current iteration of Amazon Prime."

UBS believes that there are steps Amazon could take to mitigate the damage of a price increase at Prime -- bundling "additional media content, streaming music and/or Fresh (supermarket) offerings)" into the Prime service, for example.

But all of these things cost money. So, while paying to expand services would potentially help retain Prime subscribers, doing so would also make it impossible to grow profit margins -- which was Amazon's objective to begin with.

If all this sounds like bad news to you, then you and UBS are on the same page. No sooner did the investment banker see the results of its survey than ... it promptly downgraded Amazon stock to "neutral."

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, FedEx, and United Parcel Service. The Motley Fool owns shares of Amazon.com.

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ilnewlande

I started using Amazon a lot when I broke my ankle and couldn't get to the store. It was convenient and reasonable. Subscribe and save made it even better.
Guess what?!? My subscribe and save items went up about 12% recently; so i cut way back. As the saying goes, free delivery has its price!
It reminds me of another major play for market share which went sour. Remember when WalMart was Buy American and only American? on the backs of that approach, they grew and grew until they drove lots of local merchants out of business.
And then; guess what!?! They shifted so much of what they sell is from, Oh, China.
Not nice, not cool, I think I'm gonna switch vendors, even if it means buying from several online places instead of one. Less convenient, but what are the price of principles?
One last thing while I'm here ... Be careful about the beer you drink. Anheiser Busch (however you spell it) is owned by a Belgian company. I'm thinking either Sam Adams or Simpler Times from Wisconsin. Even Rolling Rock, which used to be in Latrobe, Pennsylvania -- home of Mr. Rogers -- is owned by the Belgians now.
Really ticks me off

February 12 2014 at 7:23 PM Report abuse rate up rate down Reply
1 reply to ilnewlande's comment
wfreeberg

Amazon is still one of the most economical buying decisions. You don't have to burn fuel in your auto to price compare at multiple retailers. As to Walmart, they were the retailer that brought competitive pricing and quality to rural America. In the past we had to pay what ever the local retailer charged irrespective of value or we had to travel 20+ miles to check out the competition.

February 13 2014 at 10:19 AM Report abuse rate up rate down Reply
Jack Dogg

Greedy bastards. We gave on them, and Ups and Fed ex. screw them all.

February 12 2014 at 4:45 PM Report abuse -2 rate up rate down Reply