This chart showing Amazon’s stock collapsing after it missed analysts’ revenue expectations last week tells you why the company is considering raising the cost of Amazon Prime by $US40, or roughly 50%, to as much as $US119.
But it doesn’t tell the full story, because raising the cost of Amazon Prime — which lets customers get “free” two-day shipping all year for a flat fee of $US79 — won’t likely boost sales. It will more likely deter them by making the entry barrier higher for new customers.
And that’s why you should be sceptical of Amazon’s official statement that it may raise the price.
This is Amazon’s dilemma: Raising the price would claw back extra revenues that would assuage investors, but it may deter new revenues from customers who think that $US119 is just too much to pay for “free” shipping.
On the one hand, raising the price to $US40 million could immediately generate $US800 million in new revenue, assuming no users bail out. That’s significant because Amazon missed analysts’ revenue estimates by $US400 million. The stock collapsed 11% immediately afterward, and has declined in recent days from a high of $US403 to just $US347.
It was interesting that Amazon CFO Tom Szkutak floated the price hike as a trial balloon on his earnings call:
With the increased cost of fuel and transportation as well as the increased usage among Prime members we’re considering increasing the price of Prime between $US20 to $US40 in the U.S.
Was he trying to gauge reaction to the idea, in case it needed to be derailed before it became another costly PR blunder like Amazon’s failure to get everyone their Christmas gifts on time?
On the one hand, Amazon will keep customers who have learned to game the system because they order a lot of expensive, heavy stuff, like this guy in Florida:
Ditto for his recent bulky purchases: a five-foot tall electronic meat smoker, heavy metal safe and garden composter. Portale said that since Amazon doesn’t take package weight into consideration for Prime customers, he is getting more than his money’s worth. Even if the cost of Prime membership rose to $US300, it would still save him money, he claimed.
But most Amazon customers aren’t like that. 80-six per cent of Amazon packages weigh five pounds or less. That’s a difficult calculation to make for most ordinary customers: Are you going to order enough books and videos to wipe out the $US119 cost of getting them shipped free?
Given Amazon’s history of eschewing profits in favour of growing revenues, it actually makes more sense to cut the price of Amazon Prime (and maybe add a weight limit) than to increase it. Amazon has about $US8.6 billion in cash on its balance sheet, so it can afford to eat shipping costs for a while yet.
And given CEO Jeff Bezos’ history of giving people what they want cheaply, a Prime hike would be a huge counterintuitive move for the company.
Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.
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