Friday, March 14, 2014

Will Subscribers Drop Amazon Prime Because of Price Increase?

The question should really be how many because price changes obviously affect purchase decisions.  And while a 25% annual price increase sounds like a lot, the monthly increase is slightly more than a dollar.  Amazon Prime bundles both shipping and its video streaming business together so that the value proposition may be different for those that use the service primarily for shipping verse others that care more about online streaming.  Still, for the profitability of Amazon, such a move seemed necessary. 

Subscribers will complain about the price increase and others will likely drop the service.  But I suspect that these complaints quickly go away.  I'm confident that Amazon put all its economics and statistical research together and determined what the price elasticity of their product was to their bottom line.  As one analyst wrote, "He estimated that a quarter of the Prime base was highly sensitive and might rebel. That might cut $800 million, or about 1 percent, from Amazon’s revenue. On the other hand the increased fee from more easygoing customers would add $150 million to the bottom line, which for Amazon would be a lot."  That still results in a net differential of $700 million, a nice increase from subscription revenue. 

Don't expect that this increase will have the same backlash that Netflix felt when it thought to split its DVD mail business from its streaming one.  I suspect a number of Amazon Prime subscribers will not notice the increase when it goes into affect later this year.  It will appear on a credit card bill that will be dutifully paid without much question.  And once this increase is established and proved correct, don't be surprised to hear that Netflix makes the same choice to raise its monthly streaming fee from $7.99 to $8.99.  As a percentage, it may sound like a lot, but to most consumers its only a buck. 

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