(Bloomberg) – When Amazon.com Inc. announcing it would increase the price of its Prime program, the company said a $20 annual subscription would increase to $139. But just over half of Prime members will end up earning more than $180 a year.
Most read by Bloomberg
That’s because they pay each month, a fee that increases from $12.99 to $14.99. The company introduced the monthly subscription in 2016 to attract more middle- and low-income buyers. The strategy worked, and according to Consumer Intelligence Research Partners, 52% of subscribers are now paying every month.
Though they pay more, monthly subscribers are nearly as loyal as annual members, with about 97% of them likely to renew, compared to 99% for their counterparts, said the Chicago research firm, which conducts quarterly surveys.
“While monthly members pay a little more on an annual basis, members like the fact that they have a smaller out-of-pocket expense and the perceived flexibility,” said Josh Lowitz, co-founder of CIRP. “Despite the ability to pause and restart monthly subscriptions, our data suggests that only a very small percentage actually choose their Amazon Prime months.”
The increase announced Thursday marks the first price hike since 2018. Amazon has invested billions of dollars in ensuring packages get to customers on time amid acute labor shortages and supply chain bottlenecks. Prime subscribers get access to movies, sports programs and photo storage, among other things.
The company has added millions of new subscribers after previous price increases, and analysts say Amazon isn’t likely to lose many customers once the latest increase goes into effect. Investors welcomed the rise and sent shares soar after the company reported robust results, fueled in part by a strong performance from its cloud services division.
“Amazon has historically sold the increase in Prime to consumers by saying ‘we have a lot more, a lot more items,'” said Tom Forte, senior research analyst at DA Davidson & Co. “They’re spending billions more on content than they were four years ago. I think there’s a strong case for price increases. I think there’s a compelling case that retention rates will still be high.”
Morgan Stanley analysts led by Brian Nowak wrote in a note Friday that Amazon has attracted a large number of households with average annual incomes of $55,000 to $70,000 over the past two years. “The growth and obsolescence of Amazon’s Prime base continues to be a key driver of Amazon’s retail business,” the analysts wrote.
Amazon shares rose nearly 15% at 1:15 p.m. in New York.
The price change will take effect on February 18 for new Prime subscribers; it applies to current members who renew after March 25.
The Seattle-based company has jointly signed 60 million US Prime members in 2020 and 2021, bringing the total number to 172 million, according to CIRP. The company counts Prime members, not subscriptions. One Prime subscription can have multiple members as many households share one account. CIRP attributes the increase in signups to the online consumer rush during the pandemic.
Prime helps Amazon convert casual shoppers into loyal customers. Prime subscribers typically spend more on Amazon than non-members.
Evercore ISI retail analyst Greg Melich thought the price hike was “a little early,” but said it “should prove effective” given its strong renewal rates and extensive benefits.
(Updated with stocks.)
Most read from Bloomberg Businessweek
©2022 Bloomberg LP