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.
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.