Amazon ups Prime fee to $99 from $79: Customers likely to absorb it

Amazon raises its Prime subscription fee by $20 a year to cover fuel, transportation and video content costs.

Amazon in January hinted that it may raise the annual Prime fee, which covers free two-day shipping, video and Kindle content, from $79 and made good on the move Thursday.

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The company sent an email to customers indicating that Prime prices would go up $20 to $99 a year. A discounted student rate will be $49 a year from $10. The moves in the U.S. come after price increases in U.K. and Germany. In those countries, Amazon added video content from Lovefilm into the Prime membership. In the U.K. Amazon's Prime fee went from £49 to £79, and in Germany the prices went from €29 to €49.

In a letter, Amazon said:

Even as fuel and transportation costs have increased, the price of Prime has remained the same for nine years. 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.

On Amazon's fourth quarter conference call, the company said that it was considering raising the Prime fee by $20 to $40. Amazon opted for the lower price increase.

Amazon admits its mulling over Prime fee hike

Analysts generally think consumers will swallow the price increase. For instance, Wells Fargo analyst Matt Nemer has noted that Amazon has to give a nod to profits at some point. 

Meanwhile, Amazon has increased the Prime perks in recent years.

Nemer said:

The higher price could generate hundreds of millions in high flow through operating profit and possibly signals a profit “check in.”

Amazon may need more than Prime price increases to offset shipping costs. BGC analyst Colin Gillis has said that Amazon's biggest barrier to profits is really shipping. In a research note, Gillis said:

The shipping losses the company incurs to help drive revenue remain a barrier to profitability that is proving hard to tap down. The company incurred (fourth quarter) shipping losses of 4.7% of total revenue and 5.7% of net product sales, the difference between its reported net income of 0.9% and a respectable profit....Shipping losses are growing at approximately 23% YoY, and the losses were approximately 2x the shipping revenue in the December quarter. Increasing the cost of the Prime membership by 20-40% can help shipping revenue, but the losses are going to continue. Even if shipping revenue in the most recent quarter increased 40% to $1.59 billion, shipping losses would still be 47% greater than the losses. While raising Prime pricing and pitching “drone delivery” solutions make good headlines, shipping losses remain a burden on profits.

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