Amazon recently announced a price increase for Prime subscriptions – from $12.99 to $14.99 for monthly subscriptions and from $119 to $139 for annual subscriptions in the U.S. While a lot has been written on customers calling to ‘cancel’ Prime service in response, hacks to avoid the price increase, and whether one should switch to Walmart+ instead, we were curious how the price has trended over time, how the value Prime offers has evolved, and how consumers are likely to respond to the price increase.
The proposed increase will only be the third since Prime was launched in 2005 at a price of $79. As shown in the chart below, the Feb 2022 price was only $80.7 in 2005 dollar terms.
Figure 1: CPI adjusted price for Prime service since launch
However, as the chart shows, the benefits for Prime subscribers have exploded. Clearly the utility to a consumer of a Prime subscription has magnified in recent years and one would be hard pressed to think that price increases in-line with CPI would drive loyal subscribers away.
Related Read: Is Netflix destined to fail in India?
So how have consumers responded to prior price increases?
Figure 2: Prime subscriber growth and impact of prior price increases
If history were to repeat itself, growth in Prime subscribers could slow sequentially by 50-60%. Headwinds of high penetration and waning impact of COVID-19 would warrant an even more dramatic slowdown. In the low case, we only estimate an additional 2 million U.S. subscribers, while in the high case, Prime could eclipse 160 millions subscribers by year-end.
Is the price increase a no-brainer for Amazon?
The price increase would drive an incremental $3B+ in revenue. Losing a prime subscriber would impact subscription revenues, but also potentially reduce purchases and advertising revenue as the churned subscribers start their product searches elsewhere on the internet.
Figure 3: Contribution margin waterfall for Prime vs. non-Prime customers
Our analysis shows Amazon would have to lose 6-7 million Prime subscribers for this not to pay off. While anything is possible, this is hardly likely!
Do you agree that Amazon Prime continues to be a great deal? Share your thoughts…
