Amazon’s price hikes are a test of Prime’s stickiness

Is it worth it?
Is it worth it?
Image: REUTERS/Brendan McDermid
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As inflation in the US surges—it reached 7% in December—the fastest monthly increase since 1982—Amazon will soon raise the price of an annual Prime subscription from $119 to $139, and the monthly fee from $12.99 to $14.99.

The backbone of Amazon’s business is Amazon Prime, the delivery service launched in 2005, which has grown from providing two-day free shipping to now including a host of perks. Shoppers can order groceries via Amazon Fresh and Whole Foods, stream TV shows and movies on Prime Video, order medicine from Amazon Pharmacy, listen to music on Amazon Music, read books from Prime Readingthe list goes on. The range of benefits has lured some 200 million Prime users globally, and has kept them dependent on the system.

The price bump is the first increase in the US since 2018. For now, other countries will not see a price change.

The pandemic had been a boon for Amazon and many other delivery services. In the early months of the pandemic, Prime members spent $1,968 per year on Amazon on average, roughly four times as much as the non-Prime shoppers surveyed, according to a September 2020 Bank of America note looking at the covid-19 effect on US e-commerce and the use of Prime to investment clients.

But high inflation could disrupt the subscription model.

Higher prices everywhere, not just with Amazon

Amazon is raising prices to keep up with higher costs related to wages and transportation costs, said Brian Olsavsky, Amazon chief financial officer, on a call with investors and analysts this week. The company said the increase also comes with the continual additions to the membership.

Along with Prime, food, cars, gas, and many other things have gotten more expensive for the everyday shopper. The real test now is whether Amazon Prime’s offerings are too important for subscribers to give them up because of a price hike. The price increase is notable, particularly given the “large number” of $55,000 to $75,000 annual income households Amazon added during the pandemic, according to a research note from Morgan Stanley today. It signals the e-commerce giant’s confidence that subscribers even of modest means will stick with the service, according to the bank.

Not only is Amazon contending with higher costs but it’s facing greater competition as well. The pandemic has also made delivery commonplace. Consumers may feel that they can get a better deal ordering from other retailers that offer cheaper services like Walmart with its $98 annual fee, or Target with its $99 yearly fee, or from third-party food delivery services. And as covid subsides, consumers’ views on delivery could change as they question whether there’s a need for instant shipping or if the high price is really worth it.