It’s been a week since Amazon.com announced it’s boosting the annual fee for its Amazon Prime service to $99 a year from $79.
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The question is if the decision to boost the fee after nine years was a mistake or otherwise.
If the stock price is any indication, Investors think the move was smart. The stock closed at $373.23, down 0.7%. However, the stock is up nearly 1% since the March 12 close; the fee increase was announced the morning of March 13 and goes into effect on Thursday.
Amazon Prime users appear angry, even if a $20 annual increase works out to $1.67 a month. (“About half of what you likely pay every day at Starbucks,” as Jeff Balke blogged on the Houston Press website.)
The question is if they’ll renew their subscriptions. Surveys suggest Amazon.com will lose customers. What’s not clear is how many — or if the customers they lose will matter in the long run.
Amazon Prime offers users free shipping, access to Amazon’s video offerings, free Kindle book rentals and a host of other services. The separate Amazon Fresh service that delivers groceries will still cost $299 a year.
Amazon Prime has attracted some 23 million customers. So, raising the fee potentially boosts revenue by some $460 million. In the grand scheme of things, that represents just 0.5% of 2013′s $74.45 billion in revenue. But the additional fee revenue would flow to the bottom line and, as RBC analyst Mark Mahaney estimated for the Seattle Times, translate into 45 cents to 50 cents a share in additional operating income.
The decision is being read as a tacit admission that the move could boost free cash flow and add substance to the stock. Amazon operates under extremely low profit margins, made possible by heavy use of technology to organize and sort goods and services, fulfillment centers close to customers and tough negotiating over suppliers over price. The company said the 25% increase was needed to offset rising delivery and content-acquisition costs.
Despite all that revenue, the company reported just $274 million in net income, 58 cents a share, in 2013.
Amazon has two other advantages: Customers often don’t have to pay sales tax on their purchases. And, thanks to gaudy revenue growth over the years, the company has won a pass from investors over the skinny profits.
But the company’s guidance in its fourth-quarter earnings report on Jan. 30 disappointed investors, and the stock fell as much as 15% the next day. The stock has recovered nearly 50% of that loss since but is still off 6.4% on the year — after rising 45% in 2012 and 59% in 2013.
Yet, many customers apparently are not happy. A survey released Wednesday by the marketing firm Ask Your Target Market suggests that 4% of Prime customers plan to dump the service. An additional 24% may not renew. (Admittedly, the same size was fairly small, about 400. Of those, 63% weren’t Prime subscribers.)
On Twitter Wednesday, a customer, who identified herself as Jessica, said she was going to give up her membership. “I paid $39 as a student but won’t go up,” she wrote. But going through the Twitter posts suggested users were divided.
Saying you won’t renew or may not renew may not actually occur. Costco Wholesale has raised its annual membership fee several times in the past few years, and 90% of its members renew every year. About 47% of these buy the more expensive executive membership. And they spend more money.
Amazon Prime customers are a bit like Costco customers. They spend twice as much as non-Prime customers each year. They’re more affluent, and convenience is something they value.
So, even if Amazon sees a bleed of its Prime member numbers, the company is betting that those who stay will continue to spend and may even spend more — to justify the fee increase.