Amazon plans Prime fee hike by $20, risks consumer wrath

Fri Mar 14, 2014 4:50am IST

A zoomed illustration image of a man looking at a computer monitor showing the logo of Amazon is seen in Vienna November 26, 2012. To match Special Report TAX-AMAZON REUTERS/Leonhard Foeger

A zoomed illustration image of a man looking at a computer monitor showing the logo of Amazon is seen in Vienna November 26, 2012. To match Special Report TAX-AMAZON

Credit: Reuters/Leonhard Foeger

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(Reuters) - Inc (AMZN.O) plans to hike the annual fee for its popular Prime service by 25 percent to $99 starting next week, a move announced on Thursday that risks losing customers for a feature that has helped drive its business.

The increase comes about six weeks after Amazon warned that it may raise prices by as much as $40 to offset rising fuel and shipping costs. Prime, which offers unlimited two-day shipping among other perks, had cost $79 since its introduction in 2005.

Later on Thursday, Amazon rival ShopRunner offered a free one-year membership to its own $79-a-year service to disgruntled Prime users who have not renewed their subscription at the higher rate. ShopRunner partners with brick-and-mortar retailers like Nieman Marcus and offers unlimited two-day shipping.

The $20 hike for Prime is unlikely to spur users to drop the service en masse, analysts said. But it may temper Amazon's ability to attract new customers to Prime, seen as instrumental to boosting purchases of goods and digital media.

"We wonder if a meaningful price increase would dissuade some on-the-fence potential Amazon Primers from ponying up for the membership," RBC Capital Markets analyst Mark Mahaney said in a research note.

The move comes as Amazon faces mounting pressure to show sustained bottom-line growth, following years of rapid revenue expansion at the cost of profits. In 2013, Amazon's shipping costs grew almost 30 percent to $6.6 billion as its sales grew.

The increase in Prime's fee could add about half a billion dollars to Amazon's annual operating income, according to some analyst estimates.

"If you consider things like inflation and fuel costs, a Prime membership valued at $79 in 2005 would be worth more than $100 today," Amazon spokeswoman Julie Law said. She declined to say how the company calculated the figure.

Prime customers get a limited selection of book downloads as well as film and television streams as part of the service, which has helped expand Amazon's presence on mobile devices.

There are about 20 million Prime members in the United States, and they spend at least twice as much as non-Prime members in a given year, according to some analyst estimates.

One analyst said the hike was expected and consumers would get accustomed to paying more.

"Based on our surveys of consumers, key reasons to shop on Amazon (and online more generally) include convenience, selection, and price comparisons," R.W. Baird analyst Colin Sebastian wrote in a research note. "Prime helps to amplify the first two drivers."

But others said consumers tended to strongly resist online fee hikes, such as when Netflix Inc (NFLX.O) tried in 2011 to raise its annual subscription fee by what it called "the price of a latte." It backtracked after a customer revolt.

Some Prime members bristled at the increase in Prime, saying it was unfair to Prime users who spend more than non-users.

"I'm going to cancel: My thought is that the price should be going down. Prime customers order more from Amazon because of their membership," Caryn Brooks wrote on a Facebook Inc (FB.O) discussion moderated by Reuters.

"By having Prime members they have more guaranteed sales ... they should nurture those folks, not repel them," Brooks said.

Amazon shares ended little changed on the Nasdaq at $371.51.

(Reporting by Phil Wahba and Franklin Paul in New York; and Deepa Seetharaman in San Francisco; Editing by Lisa Von Ahn, Jeffrey Benkoe and Tom Brown)

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