During an earnings call Thursday, Amazon said it was looking into bumping up the price of Amazon Prime by 20 or 40 bucks. The Prime service currently charges a flat $79 for a year of all-you-can-ship service on millions of items.
But despite staying at the same price point since its launch in 2005, Prime has been pretty lucrative for Amazon -- in fact, some research shows Prime subscribers spend twice as much on the online shopping site as non-Prime shoppers. So why is Amazon considering raising barriers to joining rather than lowering them? Because one of the psychological factors for why Prime customers spend so much is they want to make sure they get their money's worth from the upfront subscription cost.
"Though expensive for the Company in the short-term, it's a significant benefit and more convenient for customers," said Amazon CEO (and Washington Post owner) Jeff Bezos in a press release announcing the service. "With Amazon Prime, there's no minimum purchase to think about, and no consolidating orders -- two-day shipping becomes an everyday experience rather than an occasional indulgence."
And what started as a risky endeavor has been remarkably successful at getting consumers to change their shopping habits. Plus, in the near-decade since it launched, Amazon has added on new perks to attract subscribers, like Amazon Instant Video, and a e-book lending library for its Kindle e-reader line, as well as offered discounted or special versions aimed at students and (real or fake) moms.
At first glance, it might seem pretty amazing that the service managed to hold steady at the same price for that long while adding new services -- the licensing for content for the e-book and video services aren't free, after all. But Prime is actually a pretty lucrative proposition for Amazon. According to a Bloomberg Business Week story from 2010, the service "broke even in just three months, not the two years the team had originally forecast."
While the company has been notoriously tight-lipped about the total number of subscribers, statements suggest at least 20 million people have signed up for Prime. And those 20 million people spend a lot more money at Amazon than non-subscribers: A report from market research firm Consumer Intelligence Research Partners found that Prime customers spent an average of $1,340 per year with Amazon versus non-Prime shopper who spent $650 annually.
Statistics like that have led some to suggest Amazon should consider actually cutting the price -- or giving it away for free. So why is Amazon considering raising the price?
During the earnings call, Amazon cited higher fuel and shipping costs. But there's also consumer behavior that will likely keep Prime a premium package. Right now, when they sign up, consumers are betting that the the savings they reap in shipping costs and possibly subbing Amazon Instant for Netflix or Hulu will outweigh the cost of subscribing. In that calculus, even a $40 dollar bump to Prime subscription fees, which would be a 50 percent price increase, might not seem unreasonable to current subscribers when you consider that Netflix alone will run you $96 per year.
And, as suggested by the spending habits of Prime versus non-Prime shoppers, subscribers may feel compelled to use Amazon for as many of their day to day or online purchases as possible to make sure they're getting the most out of their investment: Why leave your house when you can get something delivered to your door? And why shop anywhere else when you can get it delivered fast, for free, from Amazon? It's this conditioning that makes Prime so effective.
And if the company is confident it can convince consumers $120 per year is still a good deal for Prime, it's hardly surprising that Amazon is considering changing the price. After all, given the at least 20 million subscribers, a $40 increase could also translate into $800,000,000 in revenue for Amazon.
Disclosure: Amazon founder and CEO Jeff Bezos is the owner of the Washington Post.