Amazon Prime price hike might not lead to defections
A look at the Costco membership increases suggests that Amazon free-shipping service wouldn’t likely see a decline in renewals if it decides to raise fees.
Seattle Times business reporter
Ever since Amazon.com said it’s considering raising membership fees for its Prime free-shipping service, there’s been plenty of speculation that customers would walk away from the service.
But that’s not what happened when Costco raised rates. William Blair & Co. analyst Mark Miller studied the membership program at the Issaquah warehouse club and found that the renewal rates held steady or actually climbed each time Issaquah-based Costco hiked fees.
That history leads Miller to believe that Seattle-based Amazon, which is considering raising the annual $79 fee by $20 to $40, won’t likely see a meaningful number of customers bolt from the program.
“Our belief is that there will be minimal churn in the Prime member base, and more households will align with Amazon to do more of their shopping with Amazon,” Miller wrote.
Prime offers its more than 20 million members free shipping on more than 19 million items. Members also get access to Amazon Prime Instant Video, the company’s Netflix-like streaming video service.
And if they own a Kindle e-reader, they can use the Kindle Owners Lending Library, which lets users borrow more than 500,000 digital books free with no due dates.
The company, which hasn’t raised Prime fees since it debuted nine years ago, said it’s considering the increase to cover climbing shipping costs. The program has been enormously successful, with Prime members ordering more items, across more categories, than Amazon’s non-Prime customers.
Amazon declined to comment for this article. But Amazon founder and Chief Executive Jeff Bezos noted in a news release last December that Prime members are among Amazon’s best customers.
“They benefit from all-you-can-eat free two-day shipping on millions of eligible items and our members have a voracious appetite,” Bezos said.
With such a successful service, there’s little doubt Amazon executives studied raising rates before disclosing plans the company would consider doing so.
Costco proved that members not only are willing to pay more to be part of a club they value, but that they are willing to spend more when their fees climb. Sales to the company’s Executive Membership customers have accounted for a growing share of the company’s sales.
Executive Membership customers pay $110 a year, twice as much as the basic Gold Star membership. But Miller found that those customers, who receive 2 percent cash back on purchases up to $750, accounted for 47 percent of Costco’s total merchandise sales in the past fiscal year, up from 12 percent when the program debuted in 2001.
One reason they are spending more is they want to justify the added expense of the pricier membership.
Raising prices, of course, is never without challenge. A survey by Consumer Intelligence Research Partners found that if Amazon priced Prime at $99 a year, only about half of the respondents would either definitely or probably renew. If Amazon priced Prime at $119 a year, that number falls to 40 percent.
Consumer Intelligence partner and co-founder Josh Lowitz acknowledged that some the survey’s respondents might not actually follow through with dropping Prime.
“We knew questions about price increases almost universally receive customer resistance — generally stronger resistance than the implementation of the actual price increase receives,” Lowitz said.
But the “major resistance” to the proposed price hikes could slow the growth of Prime, which has soared in recent years.
“We would expect that a price increase would affect the rate at which Amazon Prime membership grows, but probably would not result in an actual decline in Prime members,” Lowitz said.
Jay Greene: 206-464-2231 or email@example.com. Twitter: iamjaygreene