« Continue Browsing

e-mail article Print     e-mail article E-mail

Reuters, Published February 26 2014

Why Amazon Prime shoppers may flee with fee hike

CHICAGO - As an Amazon Prime customer since December 2012, Michelle Huffman of Milwaukee has gladly paid the annual $79 fee for the perk of free two-day shipping on items ranging from tea and cookbooks to DVDs and Nestle Smarties (milk chocolate buttons imported from Germany).

But if Amazon.com Inc raises its annual Prime rates by between $20 and $40, as the e-commerce giant hinted it might during a quarterly earnings conference call in January, Huffman will rethink her decision.

"At that price, I honestly think it will be cheaper to buy my quinoa and tea cups at stores - even if they cost more," says Huffman, 27, a web producer. "I know I get Prime Video with membership but I don't see that as much of a benefit, since we already have Netflix."

Amazon spokeswoman Julie Law confirmed a price increase is being considered, but declined to elaborate on what form it might take.

Noting the selection has grown from 1 million to 19 million items since 2005, "Prime is incomparable today to where it began nine years ago," Law says. "Even as fuel and transportation costs have increased, the $79 price has remained the same."

Huffman has plenty of company in her assessment of the value Prime offers at a higher price point, especially as online competitors, and even Amazon's own subsidiaries like Zappos.com and Diapers.com, offer free shipping.

REVOLT

Experts agree that if Amazon resorts to an across-the-board price hike, there's a high likelihood of consumer revolt.

At the current fee, Prime makes sense for customers who order around 10 packages a year, says Randy Allen, a professor at Cornell University's S.C. Johnson Graduate School of Management, basing her estimate on an average shipping cost of about $7 per order, which she says is conservative.

That volume encompasses a "majority of customers," Allen says, especially those who order high-ticket items, from stereo speakers to big-screen HDTVs, that would bring even higher shipping costs.

For a price point of $99 to $119, customers would have to order 14 to 17 packages a year, Allen estimates.

That's not too many for a customer like Huffman, who placed 17 orders in 2013.

It also would make sense for Liz Springer Carey, an educator from Birmingham, Alabama. She and her husband signed up for Prime about 3 years ago, and they've averaged 21 orders per year ever since. They've bought shoes, clothes, printer ink, and even sonic screwdrivers from the British sci-fi show "Dr. Who."

Nevertheless, neither Huffman nor Carey think it would be worth it to spend more than the $79 they've grown accustomed to, and many others agree.

In a survey of more than 6,400 current Prime customers, Prosper Insights & Analytics found that 63 percent of consumers would pay only the current $79 fee for Prime - and no more. An additional 29 percent would pay $89-$99, and only 8 percent would pay $109 or more, a $30 minimum increase.

"It's not going to work - if Prime members get this blanket email that rates are going up $20, Amazon is going to see a push back for this," says Pam Goodfellow, Prosper's consumer insights director. "The few consumers willing to pay $109 for Prime are younger, predominantly male, have a lot more money to spend and spend heavily on the electronics category."

The customers who fall by the wayside are likely to be the lower-volume shoppers, precisely the ones Amazon is trying to grow wallet share from, says Rafi Mohammed, founder of Culture of Profit, a Cambridge, Massachusetts consulting company.

Prime members are already big spenders, averaging $1,340 annually, while customers with no other Amazon relationship (such as having an Amazon-branded credit card or owning a Kindle e-reader device) spend only $529 annually, according to Consumer Research Intelligence Partners, a Chicago-based research firm.

Some industry analysts counter that consumer grumbling could quiet down quickly once Amazon customers get used to whatever the new Prime fee will be.

"Look at what happened at Costco, when they raised membership fees - nothing," says Laura Heller, executive editor of FierceMarkets Retail. "Some heavy Prime users love the service and feel they get a lot for the annual fee."

That said, Heller says hiking the fee past $99 could be a "a big psychological barrier" for shoppers.

Instead of crossing that barrier, Heller predicts the company will keep its annual fee below $100, but charge separate fees for some services that are now included for free.