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Revised Pricing Can Be Tricky for Amazon

April 16, 2014 | About:
mitu77

mitu77

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Amazon (AMZN) has always been striving to provide a better online shopping experience to all its customers by providing wide inventory choices, best pricing, efficient shipment and prompt post-sale support. It’s been some time since it launched the Prime membership model to customers at marginal annual subscription fees of $79. The Prime membership model provided free, unlimited two-day shipping on 1 million Prime selected items.

Over a period of time, the inventory of 1 million grew to around 19 million. Various costs like fuel, transportation, manpower, etc., also increased, but the Prime membership charges have remained unchanged for U.S. members till now.

Amazon has now increased the Prime membership price in the UK and Germany. Members in Germany will now pay €49 as against €29, up by almost 69%, while UK members will be charged £79 as against £49, up by almost 61%. The acquisition of Lovefilms does benefit members from UK and Germany as it enables then to stream videos just like their counterparts from the U.S.

So it’s now quite imminent that members in the U.S. will certainly be facing a price hike in Prime membership subscriptions.

Amazon had earlier sent signals to U.S. members in their last quarterly earnings call that it’s all set to increase the prime membership subscription cost. The increased price slab is expected to be in the range of $20 to $40, and U.S. members would then have to pay in a range of $99 to $119 annually, up by 25% to 50%.

Various surveys were conducted based on the anticipated price hike for U.S. members, and the results were quite interesting. A survey by CIRP (Consumer Intelligence Research Partners) indicates that 94% of the members would renew at $79. A price hike in the range of $20 to $40 would result in renewal of 58% and 24%, respectively. So, if the price hike is in the upper range, Amazon may be badly hit by members opting out.

With the increase in price, Amazon may add some value-added services for it members and also some extra marketing campaigns. This further will pinch the margins of Amazon as operating cost will increase on implementing the price revision policy. We haven’t witnessed any high budget rigorous advertising campaigns from Amazon so far, but this cannot be ruled out in the future.

Analysts anticipate that Amazon’s revised price for Prime membership should not exceed $99, going with the lower slab of the price increase range. The $119 price is most unlikely to happen although the price band referred by Amazon in last quarter was in the range of $20-$40.

Surveys also indicate that 74% of Amazon’s members opted out from renewing their membership as the news of price revision was in the air. This goes on to indicate that Amazon should stick with the lower cap of $20 hike, with revised price tag of $99 annually. One can expect mass drop outs if this price is based on the upper cap of $40 and could cause a negative impact on the top and bottom line for Amazon.

Amazon would also have to re-work on its allocated budget for licensing and content management. Netflix is the nearest competitor in the video streaming segment and it spends around $2.5 billion on content licensing. Amazon is expected to spend at least 50% of what Netflix is spending.

Conclusion

Revenue loss from member dropouts and increased expense for content management and video stream licensing can burn Amazon, so the company needs to bring about the price increase in a strategic way.


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