Amazon Raises Prime Membership Fees: What You Need to Know

MarketsMotley Fool

E-commerce giant (NASDAQ: AMZN) announced yesterday that it was boosting monthly membership fees for its popular Prime service. The company is raising the price from $10.99 per month to $12.99 per month -- an 18% increase. Student members that pay monthly will see their prices rise by a comparable percentage, from $5.49 per month to $6.49 per month.

However, the changes only apply to members that pay on a monthly basis. The annual subscription prices ($99 per year, or $49 per year for students) are unchanged. It's been nearly four years since the last Prime price increase, when Amazon bumped the annual price from $79 to $99 back in 2014.

Continue Reading Below

Here's everything you need to know about the changes, and why Amazon's making them.

Net shipping losses are growing

There are a couple likely reasons why Amazon is making the change. First and foremost is to generate more revenue to cover rising shipping costs. Amazon used to disclose its net shipping costs each quarter, but abruptly stopped in Q2 2017. The company has been increasingly losing money on shipping costs, and while Amazon has an incredibly high tolerance for absorbing losses if those losses can drive growth, the figures underscore why a price increase is in order.

Shipping losses jumped precipitously in 2016.

For Q1 2017, the last quarter that investors have net shipping cost data for, net shipping losses widened by 30%.

Shipping revenue includes some (unspecified) portion of the Prime membership fees as well as fees earned from merchants for Fulfillment by Amazon (FBA) services, but excludes any shipping fees charged by third-party merchants where Amazon does not fulfill the orders. Amazon now only discloses its shipping costs ($5.4 billion in Q3 2017) but not shipping revenue, so investors no longer have a sense of its net shipping costs, but the trend was already abundantly clear.

Pushing members to annual plans

The monthly subscription option may have been more popular among lower-income consumers or those that don't want a long-term subscription, but the price structure change even more strongly encourages consumers to sign up for the annual plan.

The savings associated with the annual plan just jumped quite a bit. That's a strong incentive for monthly members to upgrade to the annual plan. Of course, Amazon would prefer customers on the annual plan because Prime members tend to spend more on Amazon, and it can foster long-term relationships with those customers while enjoying greater financial visibility.

It's hard to quantify what financial impact the change might have. How many Prime members Amazon has is a closely guarded secret. Even if investors knew this number, they'd need to know the mix of monthly subscribers vs. annual subscribers as well, since the change only affects the former group.

The value is still there

Prime offers such incredible value that it's extremely unlikely that the price increase will cause any type of mass customer exodus. It's comparable to Costco memberships or Netflix subscriptions -- both of which also receive price increases every few years. Those companies' respective member bases don't see any lasting adverse effects from price increases, since they still provide strong value to consumers.

The same will hold true for Amazon.

10 stocks we like better than AmazonWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Amazon wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 2, 2018

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Evan Niu, CFA owns shares of NFLX. The Motley Fool owns shares of and recommends Amazon and NFLX. The Motley Fool recommends COST. The Motley Fool has a disclosure policy.