Friday, March 14, 2014
NEW YORK (AP) — Amazon is betting that shoppers will pay $20 more for its popular Prime two-day free shipping and video streaming service of movies and TV shows.
The mega online retailer said Thursday that it is raising the price of Prime to $99 a year as it seeks to offset rising costs to ship products to customers. It's the first price hike since Amazon rolled out the service in 2005.
The move could please investors at a time when Amazon continues to face pressure to boost its bottom line after years of furious growth. As more Americans shop online, Amazon has spent heavily to expand its business into new areas — from movie streaming to e-readers and groceries — often at the expense of its profit.
But the price increase also threatens to scare away online shoppers who tend to resist fee hikes. The company, which warned it would probably raise the price of Prime by $20 to $40 in January, is bolstering the membership program by adding more items available for two-day shipping and rolling out a greater selection of streaming TV shows and movies.
Still, online shoppers don't always react favorably to price hikes. For example, when Netflix tried to raise its annual subscription fee in 2011. The online video streaming service had to do an about-face after widespread customer backlash and a jarring stock plunge of 80 percent from its highs.
Social media was buzzing on Thursday after Amazon announced the price hike. Many Prime users' comments fell equally on either side of the fence between those who didn't mind the increase and those who planned to stop using the program.
Nick Begley ordered from Amazon 53 times last year, everything from Curious George books for his toddler to a car phone charger. Begley, 33, says he shops at Amazon more since joining Prime in 2012 and is hooked on the convenience.
"It's my go-to retail site," says the resident of Salisbury Mills, N.Y. "$79 was a great price, but $99 is not enough for me to give it up."
Rick Valente, who lives in Boston, felt the complete opposite way. After learning of the increase, he checked how much he actually uses Amazon: He realized Prime wasn't worth it for him.
"It was never worth it to begin with and it definitely isn't worth it with the price increase," Valente, 25, says.
Amazon stressed in an email to members Thursday that it has not raised the price on Prime in nine years even though fuel and transportation costs have increased, it's added new services and the number of products available for two-day shipping has grown to 20 million from 1 million. The company doesn't disclose how many Prime members it has, but said in December that it has "tens of millions" of members worldwide.
Analysts say that if Prime users are turned off by the increase, it could have a significant impact on Amazon's business. Since it was introduced, Prime has increased customers' appetite for speedy and reliable service, said Jordy Leiser, CEO of StellaService, which tracks customer service. Although Amazon doesn't release data, analysts say Prime members are more loyal and spend more money on the site than non-Prime subscribers.
"The intersection of consistency and convenience for these customers has attracted so many people," Leiser says. "It shaped the expectations of everyone in the industry."
Cowen & Co. analyst John Blackledge, who estimates there are about 23 million U.S. prime members, says he doesn't expect the continued growth of Prime members to slow down despite the price increase.
Investors, who along with analysts have been split on whether heavy investment at the expense of profit is the best strategy for Amazon, kept shares nearly flat on Thursday. After rising slightly in the morning, shares slipped 2 cents to $370.62 later in the day. The stock is down 7 percent since the beginning of the year.
"Some investors will continue to voice concern about Amazon's seemingly endless appetite for investment," said Citi Investment Research analyst Mark May in a client note. "We, on the other hand, continue to believe these investments make sense of driving long-term growth and greater absolute profits ... over time."