Is Increasing The Amazon Prime Subscription Cost A Smart Pricing Strategy?

Patrick Schneidau

Amazon Prime members talk about the service like it’s the best thing since sliced bread, with unlimited two-day shipping, free streaming content and more for $99 a year. So when Amazon recently announced plans to hike the membership dues, its pricing strategy stirred public backlash, according to The Wall Street Journal’s MarketWatch blog.

For nearly a decade, Amazon has offered its Prime service as a bundled single-tier membership. Members won’t be happy to pay an extra $20 to $40 for the service, and Amazon should expect a lot of cancelled Prime subscriptions. But the wisdom of this pricing strategy seems to be an open question.

Think back a few years to when Netflix faced a similar situation. The company provided DVDs and streaming video as a one-tier membership, and enraged customers when it raised the price of its monthly subscription by a few dollars. Despite the outcry over its pricing strategy, Netflix continued to offer excellent value and convenience. Like Netflix, Amazon has built a loyal base that people will come back to for the convenience.

Amazon’s decision to raise its membership price is driven by financial motives, rather than customer service concerns, and the company should come out ahead by pursuing this pricing optimization. From a revenue standpoint, Amazon can afford to lose a lot of Prime subscriptions and still increase earnings. It’s interesting that Amazon seems very resistant to unbundling the Prime services as a means of offering different membership tiers; perhaps that change lies a little further into the future.

The debate over Prime pricing comes down to how much power Amazon has in the relationship. If you’re one of the people who really love Amazon Prime, are you going to drop the service over an extra $20 to $40 annually? Probably not. If Amazon has enough of the power in the relationship — as is usually the case — its customers will get over any short-term emotional response.

Source: MarketWatch, February 2014

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