Amazon Hikes the Price

Written by Olivia Ritchie

The fast pace of technology growth has put online shopping in the spot light. Consumers are drawn to the convenience of shopping from their own home and retrieving their items from their doorstep. The benefit that comes from this convenience exceeds the opportunity cost of testing the product in stores or forgoing the price of shipping and handling. This puts companies, like Amazon, on the forefront of consumer convenience. They have offered Amazon Prime in the United States since 2005 and since then membership has grown to 20 million users. The program offers free shipping, free instant video access, a library lending system, and a free book download each month.

According to finance.fortune.cnn.com, “The Seattle-based online retailer sent emails to both its regular Prime and student membership program customers announcing a $20 price increase for the regular membership (from $79 to $99) and a $10 increase for students (from $39 to $49)”. The article goes on to argue that the price increase made sense due to Amazon Prime’s incredible recent growth. The company claims that this growth rate has peaked and the wiser investment would be, “spending money on better content for its video streaming services and continuing to build out its fulfillment-center infrastructure so that it can efficiently ship to every corner of the country in two days or less”. In other words, the price increase is expected to build revenue so Amazon can expand.

The graph above shows the profit margin trend that Amazon experienced from 20015 to late 2012. Profit margin is defined as the amount of revenue that exceeds costs. Amazon experienced an explosive 20% increase in profit margins in 2013, not seen on this graph. The company claims this as justification for a price increase. However, Amazon is taking a huge risk. They are raising prices without adding any additional benefits to the Prime package. According to Forbes.com, “Amazon is rumored to be getting ready to roll out a music streaming service, along the lines of Apple’s iTunes Radio as well as a set-top box akin to the Roku or AppleTV”, but this is not certain as of now. Therefore, Prime customers face a choice: pay $20 more for the same package they’ve received the past 9 years, or go without the convenience of Amazon Prime. It is, again, a cost to benefit ratio.

In my opinion, Amazon is taking too large of a risk. A 25% price increase is not something most consumers would ignore. It is clear that Amazon has created something unlike any other company with its Prime package, however, increasing the price simply because they can is not going to sit well with customers, and definitely not with any potential members.

http://www.geekwire.com/2014/reaction-amazon-prime-price-hike-underestimated-report-finds/

Geekwire further analyzes the potential consequences of Amazon’s decision, reporting that, “Amazon’s rating fell from 93 percent to 83 percent in the two days following the price hike”. For company that has been known for its low prices, is this really a smart move?

WORK CITED

Duryee, Trisha. "Backlash from Amazon Prime price hike may be worse than Amazon thought, report finds." GeekWire. N.p., n.d. Web. 5 Apr. 2014. <http://www.geekwire.com/2014/reaction-amazon-prime-price-hike-underestimated-report-finds/>.

Matthews, Christopher. "Amazon Prime price increase: Why it's raising prices now." CNNMoney. Cable News Network, 13 Mar. 2014. Web. 5 Apr. 2014. <http://finance.fortune.cnn.com/2014/03/13/amazon-prime/?iid=obnetwork >.

Rogowsky, Mark. "Amazon Prime Goes To $99, Newcomers Have A Week To Jump In Before The Price Increase."Forbes. Forbes Magazine, 13 Mar. 2014. Web. 5 Apr. 2014. <http://www.forbes.com/sites/markrogowsky/2014/03/13/prime-time-amazon-gives-newcomers-a-week-to-jump-in-before-the-price-increase/>.