Amazon (NASDAQ: AMZN) announced a price increase for its Amazon Prime service during its first-quarter earnings call in April. Annual subscribers will pay an extra $20 per year for unlimited 2-day shipping, Prime Instant Video, Prime Music streaming, extra discounts at Whole Foods, and various other perks. Monthly subscribers faced a $2 per month price increase as well earlier this year.
Amazon has good reasons for increasing the price of Prime, especially as it expands benefits to Whole Foods shoppers and adds more original content to its video library. And it seems most subscribers agree. A recent survey from AlixPartners found just 6% of respondents have cancelled their subscription due to the price increase. Another 8% said the price increase was a reason they chose not to subscribe. The vast majority said the change won't impact their subscription, or they didn't even know about the price change in the first place.
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When you consider the strong retention for Amazon Prime combined with the price increase, Amazon may have just added another $1 billion to its bottom line.
A Netflix approach to price increases
Comparing Amazon Prime to Netflix (NASDAQ: NFLX) isn't always appropriate, but their philosophies on price increases are very aligned.
"You have to earn it first by doing spectacular content that everybody wants to see," Netflix CEO Reed Hastings explained during the company's first-quarter earnings call. "But if you do that, you can get people to pay a little bit more because then we're able to invest more and further improve."
Indeed, Amazon took the same approach. It added tons of value to Prime in the four years since its last price increase. Even then, the $20 per year price increase isn't huge. For reference, Netflix increased its price on its most popular plan by $3 per month ($36 per year) in an even shorter period. So, it's no surprise that most Prime members are willing to stick with Amazon.
A billion-dollar price increase
While the price hike may be easy to swallow for most Prime subscribers, it could mean a lot for Amazon because of the massive scale of its business. Over 56 million U.S. households subscribe to Amazon Prime, according to an estimate from eMarketer. At an additional $20 per account per year, that's $1.1 billion in increased revenue.
Before the price increase, eMarketer expected Prime membership to increase 7.8% next year. With approximately 45% of U.S. households already subscribing, the results of the AlixPartners survey suggest a potential 4.4 percentage point drop in new subscribers and a 2.7 percentage point drop from cancelled subscriptions. Another 9% said they plan to cancel their subscriptions, and if all of them follow through, it would negatively impact Prime members by about 4 percentage points. All of that would add up to a 3.3% decline in subscribers.
I don't think Amazon will experience such a sharp decline in membership. Even with backlash from its price increases, Netflix has managed to continue adding subscribers at a good pace in the "saturated" U.S. market. Amazon may experience a slowdown in growth over the next year, but I expect things will pick up again as old members come back and new members continue to join. Even in the worst-case scenario, where Netflix experiences a 3.3% decline in membership over the next year, the price increase will result in an additional $900 million in revenue, which will practically fall straight to the bottom line.
With less than $4 billion in net income over the last four quarters, an additional billion dollars in high-margin revenue is a big deal for Amazon.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.