TIME E-Commerce

Amazon’s Prime Price Hike Is Actually Crazy Brilliant

Amazon.com Illustrations Ahead Of Earnings
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Amazon raised its Prime membership to $99 in a move that could boost the company's bottom line by hundreds of millions

Amazon’s decision to raise the price of its popular Prime service to $99 was cheered by Wall Street on Thursday, as investors pushed the company’s stock price higher and analysts said the move could boost the online retail giant’s bottom line. Amazon is betting that Prime subscribers will accept the price hike, which the company justified by citing rising shipping costs. It’s the first price increase in Prime’s nine-year history, Amazon said.

Amazon shares increased by 1% in after-hours action Thursday following a bleak day of market trading, with major indices down more than 1%.

Amazon Prime offers free two-day shipping, streaming movies and TV shows, as well as access to the Kindle e-book lending library. The service is credited with helping to drive explosive growth at the world’s largest online retailer. In January, company executives said they were considering a $20-$40 price increase for Prime, and evidently settled on the low-end of that range, possibly because surveys showed that a price hike might cause some customers not to renew the service.

In February, analysts at financial services giant UBS surveyed Amazon customers about a potential Prime price increase and were “negatively surprised by the results.” Although 94% of Amazon Prime customers surveyed said they were likely to renew at the $79 level, “these percentages dropped precipitously when price increases of $20 and $40 were introduced (to 58% and 24%, respectively).”

After the price increase was announced, many Prime subscribers took to Amazon’s discussion forums to vent their frustration. “I have been a Prime member for many years and will not be bullied into paying more!!!” wrote one user. “Not a chance I’m renewing,” wrote another. “First, they start using USPS and missing their 2 day windows and now a $20 price hike.”

(MORE: Don’t Want to Pay $99 for Amazon Prime? Here Are 5 Alternatives)

Following Thursday’s announcement, however, several Wall Street analysts downplayed the possibility of a major customer exodus. Amazon does not disclose exactly how many customers subscribe to the Prime service, although in December the company said Prime has “tens of millions” of subscribers worldwide. The generally positive Wall Street response was not surprising because investors have been pushing Amazon to deliver more robust profits.

“We don’t expect a large number of cancellations as a result of the increase, and think that some published surveys will prove to be over-estimating the negative impact,” Macquarie Securities technology analyst Ben Schachter wrote in a note to clients. Schachter said he was surprised that no additional services were announced as part of the price hike, but noted that Prime’s “value to consumers has risen greatly over the past nine years, as the price has been held flat.”

J.P. Morgan technology analyst Doug Anmuth characterized $99 as a “palatable price point,” and said he expects Prime “to remain a strong driver of revenue growth at Amazon in the longer term given Amazon’s large product selection, the shipping benefits of Prime, and continued additions to Prime Instant Video and Kindle Lending Library.” Anmuth believes the price increase will translate into increased annual revenues of $250-$300 million for the company, he wrote in a note to clients.

RBC Capital Markets technology analysts Mark Mahaney is even more bullish on the move. “Assuming a U.S. Prime sub base of approximately 20 million, we believe that the price increase will generate between $300 million and $400 million in incremental annual operating income,” assuming 1% to 5% of Prime subscribers don’t renew the service, Mahaney wrote in a note to clients.

After Amazon’s announcement, at least one of the company’s rivals moved to capitalize on the price increase. ShopRunner, which works with brick-and-mortar retailers like Nieman Marcus to offer two-day shipping, announced a free one-year membership for Amazon Prime subscribers who have not yet renewed their membership at the higher rate. “We heard about the recent price increase and wanted to help,” ShopRunner announced on its website.

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