Prime Increase

Prime increase1

There are many online stores around the world that offer a variety of shipping deals to entice shoppers into spend more at their website. Deals range from offering a low, fixed price to free ground-based shipping for orders over a certain dollar figure. One particular shipping deal has been a success at a certain e-tailer for many years, but will a recent price increase curb its customer’s interest?

Prime, offered by Amazon.com, is a service that, among other benefits, offers customers the opportunity to receive two-day shipping on their purchases for a single annual subscription fee.  There is no minimum order amount, and while Prime shipping is available for millions of items, it doesn’t include everything on its website. Recently, the company announced that the price for Prime membership will increase from $79 to $99 per year. Will the 25 percent increase cause subscribers to cancel their membership?

Customers who shop frequently at Amazon are likely to save more money with Prime than they would spend on the equivalent shipping option without Prime. A casual shopper purchasing items only a handful of times or less per year could save more by paying directly for two-day shipping than purchasing a Prime membership, absent other membership considerations. If an individual purchased one item per month at a two-day shipping rate of $14.48 for example, the annual cost of the purchase would amount to $173.76, a modest increase of $74.76 greater than the cost of a Prime membership. Purchases exceeding one per month could magnify the savings of Prime membership even further. With such a significant savings potential for higher volume shoppers, will offering discount shipping options hurt Amazon’s bottom line?

In fiscal year 2012, Amazon realized a $2.85 billion loss on outbound shipping activity. In fiscal year 2013, that loss increased to $3.53 billion. While its losses on shipping costs have increased over the past two years, Amazon is continuing to expand its efforts to reduce such costs.

In its 2013 annual report, Amazon states: “We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing placement of fulfillment centers, negotiating better terms with our suppliers, and achieving better operating efficiencies. We believe that offering low prices to our customers is fundamental to our future success, and one way we offer lower prices is through shipping offers.”

Though the Prime membership price increase may not be entirely welcome news to customers, most participants in the program are unlikely to withdraw their subscription if they intend to continue shopping at Amazon, particularly with the recent service enhancement of Sunday delivery through the U.S. Postal Service.

Do you think Amazon could reach a break-even point in outbound shipping activity more rapidly by making the U.S. Postal Service its exclusive shipping partner?

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1 Comment

  1. Jonn

     /  March 25, 2014

    I don’t use Prime since I enjoy their free shipping with $35 purchase, but I’d like to see USPS ship more for them. Prime mailings use UPS.

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