The cost of convenience is going up.
Amazon announced Thursday that it was raising the price of its Prime membership service by $20, to $99 a year, the first hike since the program was launched in 2005. Prime members — among the company’s most loyal customers — receive free two-day shipping on select items and access to a library of instant, streaming video as well as books.
The reaction to Amazon’s decision is something of an experiment that the retail industry will watch closely. Will the e-commerce giant convince existing Prime customers — some of whom have a caffeine-like addiction to the service — that it’s worth the higher price tag? Will it modify its services to offer shoppers more bang for their buck? Or will it alienate them as it turns its focus toward profitability? Its success or failure could prove a model to other retailers offering subscription services.
On Amazon’s discussion board, customer angst was quickly apparent. “I’ll not be renewing my Prime. Not worth $99 a year for me. It’s been fun, but fun and necessary are 2 different things,” wrote one commenter named Tickled Dog.
“It is something I’m going to have to think hard about before I let it renew again,” wrote another named Sorwen.
It’s rare for Amazon, which was founded by Washington Post owner Jeffrey P. Bezos and has been content to be a loss leader, to raise the cost of a product. But the company’s shipping expenses have long eaten into its bottom line, analysts say. In fact, even increasing Prime’s membership fees may not be enough to boost its profits.
“While raising Prime pricing and pitching ‘drone delivery’ solutions make good headlines, shipping losses remain a burden on profits,” Colin Gillis, a technology analyst at BGC Partners, wrote in a research note Thursday. (Amazon said last year that it was developing drones to deliver packages in as little as 30 minutes.)
In its fourth-quarter earnings report, Amazon posted a profit of $239 million, after two successive quarters of losses.
The retailer said Prime has at least 20 million members, so a $20 price increase gives it about $400 million more to put toward infrastructure and content costs. Members make up about 45 percent of all Amazon customers and spend about twice as much, according to a report by Consumer Intelligence Research Partners, a research firm.
The price hike is likely to make Prime customers spend even more to get their money’s worth, said Josh Lowitz, the research firm’s partner and co-founder.
“This may dissuade some lower-value casual shoppers, but those who stay with it will have a subtle encouragement to spend more,” he said.
Amazon hinted at a possible price increase in January, and on Thursday it reaffirmed that the logistical costs of Prime had forced its hand.
“Even as fuel and transportation costs have increased, the price of Prime has remained the same. If you consider things like inflation and fuel costs, a Prime membership valued at $79 in 2005 would be worth more than $100 today,” Amazon spokeswoman Julie Law said in an e-mail.
The extra revenue is also critical as the company builds out its range of in-house products, such as the Kindle line of e-readers and tablets, and ramps up its investment in original content to compete with streaming services such as Netflix.
Speaking of Netflix, Amazon is not the first major retailer to raise prices on a popular service.
When Netflix suddenly raised the cost of its video streaming service by about 60 percent in 2011, the company faced an instant backlash. More than 800,000 subscribers abandoned the site in a single quarter, forcing the company to restore its original fee. Wholesale giant Costco had a better result after it raised its membership fee by 10 percent in 2012, its first increase since 2007. Customers continued to shop there, and the company posted a profit the next year.
Amazon’s U.S. price hike follows a similar move in Europe this year, when the company increased membership costs by more than 60 percent for British and German customers, expanding its video offerings in the process.
The retailer’s stock price was flat Thursday at $371.51.