How Far Can Amazon Push Its Customers' Loyalty?
Mar 13 2014
I'm an Amazon Prime addict. I started using the service in college when my brother told me I could get it for free, thanks to the online marketplace's Amazon Student program. The thought of free two-day shipping was too good to resist for someone who was devouring books at an alarming rate for a senior thesis. By the time Amazon told me I'd have to start actually paying for this special treatment, saying no didn't feel like an option. I wasn't just buying books anymore; I was ordering everything from deodorant and underwear to breakfast cereal in bulk.
In other words, I'm the perfect example of Amazon's dream customer. That's always been the company's plan with Prime: Suck people in with a compelling service, and then get them to shift more and more of their shopping habits to the site. Cost be damned—if Prime became more expensive, that would just encourage people to buy even more stuff through Amazon to justify a heftier subscription fee.
At least, that's the logic I bought into today after Amazon announced that it would be raising its annual Prime subscription fee from $79 to $99—the first price increase in its nine-year history. Sure, $100 is a lot to spend on anything in a year. But would I rather take the subway down to H&M every time I needed new socks? What am I, a Luddite?
I doubt I'm the only one who's been thinking that way. Amazon doesn't say what percentage of its customers are Prime subscribers, but it's in the tens of millions. Sixteen million, or 40 percent of all Amazon shoppers, according to a report from the firm Consumer Intelligence Research Partners released in late 2013. Others put the number as high as 20 million, according to the Wall Street Journal.
Clearly, many people are willing to pay a premium for the thing. And what's another $20 a year when Amazon now gives its power users access to a host of perks, like access to its Amazon Instant Video service?
Giving up a few beers or a dinner out doesn't seem like much of a sacrifice compared to all the time and money Amazon Prime has saved me over the past few years. But I have to wonder what the current price jump portends for the future of Amazon. The company knows that I'm an addict. And like any addict, I'm not entirely reasonable when it comes to my spending habits. I say that Prime saves me money, but really I'm just assuming it does. The real convenience is that it saves me from lurking on countless other websites just to find the best possible deals.
So once I'm hooked, what's another $20? Or another $50? How far can Amazon push Prime before it starts to lose customers rather than continue to gain?
Several surveys have been conducted recently posing this exact question. One from Bizrate Insights (as reported by USA Today) found that 46 percent of respondents felt that the current $79 price tag was already "too high," with 39 percent saying they would cancel their membership if fees rose by $10 or $20. A UBS survey reported by Forbes, meanwhile, found that 94 percent of people were happy to keep their subscriptions at the going rate. Once the price jumped by $20 or $40, however, that number dropped to 58 percent and 24 percent, respectively.
Amazon, for its part, justified the price bump—which will go into effect next month, on April 17—by saying that the service has become more valuable thanks to its increased offerings (like Instant Video) and because it needed additional funds to support the infrastructure that makes the service possible in the first place—namely, video-streaming rights and shipping costs.
Whether or not customers will buy that logic remains to be seen. But there's a larger issue at play here that has to do with Amazon's unique history as a tech company. As Brad Stone, a Bloomberg reporter and author of "The Everything Store: Jeff Bezos and the Age of Amazon" has argued, the business has always been run at razor-thin profit margins for a simple reason: Bezos "doesn't care" about them. To quote a piece Stone wrote in 2013 that's still relevant today:
Bezos is more concerned with driving cash flow than making money because he believes the opportunity offered by the Internet, and by e-commerce, is massive and still largely untapped. To him, it’s still a land grab. So he’s prepared to cut prices to the bone and add all those freebies to cultivate customer loyalty and drive sales growth. Then he reinvests it all in more low prices and further expansion, driving additional customer loyalty.
Amazon can only grab so much land before its investors start demanding a return, however. If it's latest earnings report is any indication, the buck may stop soon. Despite increasing revenue by 20 percent in the fourth quarter of 2013, Forbes noted at the time that it still "fell short of Street expectations on both revenue and earnings per share," leading traders to push its stock price down.
Amazon first floated the possibility of raising its Prime fees by $20 or $40 in the earnings call to explain that financial news, so it's tempting to see the move as a defensive one. At the time, analysts predicted that the price jump "could add between $500 million and $1 billion to the company's top line," according to the Wall Street Journal.
That makes sense for Amazon's "top line." But after investing so much to "cultivate customer loyalty" over the past decade, how much of the cost can Amazon start passing off to those same shoppers?
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