Late last week, Amazon announced that it would be increasing the price of Amazon Prime by $20, to $119 a year. The hike was explained as being commensurate with increases to Prime’s value—the service provides free two-day shipping, access to free music and videos, and other perks. Investors, who have dealt with some presidential tweet–induced turbulence in recent weeks, were ecstatic: Amazon’s already insanely valuable stock soared to new heights. There were grumbles from consumers (and a rash of articles about ways to avoid the hike published in, among other places, the Jeff Bezos–owned Washington Post), but no real sense of a budding backlash. This was not analogous with Netflix’s disastrous 2011 price hike, which derailed the company for over a year. Prime has become too ingrained into the fabric of consumer behavior; with Amazon capturing more than 50 percent of online sales growth, the company increasingly is e-commerce.
Prime is Amazon’s most important program. It’s synonymous with Bezos’s image of a company that’s all about customer satisfaction. It is becoming one of the most omnipresent aspects of American life: More households subscribe to Prime than attend church regularly. But while e-commerce is still growing—its market share hovers around 10 percent, meaning that we still have a long, long way to go until we reach a post-retail world—Prime is reaching a saturation point, especially with Amazon’s middle- and upper-class base of customers. So the price hike offers us clues about Amazon’s approach to its still unprofitable retail business.
Amazon Prime’s yearly fee has always been a bit arbitrary. When the program was first conceived in 2005, Amazon presented Bezos with a number of price points, ranging from $49 to $99 a year. Bezos, according to journalist Brad Stone’s book The Everything Store, initially settled on $79, telling his team that the number “needed to be large enough to matter to consumers but small enough that they would be willing to try it out.” Vijay Ravindran, one of the program’s creators, concurred. “It was never about the $79,” he told Stone. “It was really about changing people’s mentality so they wouldn’t shop anywhere else.”
Amazon has built its empire on low prices and fast shipping, which ensure its customers won’t shop anywhere else. Nearly 20 years ago, Bezos noted, “There are two kinds of retailers. There are those folks who work to figure how to charge more, and companies that work to figure how to charge less, and we are going to be the second.” It was a passive aggressive remark, aimed at Barnes & Noble, a company Bezos was intent on undercutting but probably hasn’t thought about it in at least five years. Still, it was a basic articulation of the core concept underlying Amazon’s retail business: don’t gouge customers. It has also been a principle that has led to Amazon, which has a near monopoly on e-commerce, losing tons of money on its retail business. While the company has become enormously profitable over the last few years, that is entirely thanks to Amazon Web Services, its cloud computing operation.
The decision to increase the cost of its Prime subscription by $20—and by $40 over four years—flies in the face of those principles. But Amazon has captured enough customers now that it doesn’t have to worry about acquisition the way it did during Prime’s first decade. The first price increase of $20 four years ago was met with skepticism, but Prime has continued to expand. Amazon made a bet that its customers wouldn’t care if it raised that price again, and that bet seems to be right. As Stone wrote earlier this week, this time “Amazon is raising the price of Prime not because it has to but because it can.”
Given all of the nervousness about a potential “tech-lash”—which has only increased in the wake of Facebook’s Cambridge Analytica scandal—and heightened regulatory intervention, it was maybe a riskier bet than it looked. But Amazon’s wager that its customers would quietly submit to higher prices on Prime is a testament to just how popular the company is, and just how loyal its Prime members are.
It also says something about how Amazon is planning to make money. During the company’s rise, one concern that was often voiced by its detractors was that it, like any good monopolist, would dramatically raise prices once it achieved its desired market share (which was, and still is, 100 percent). This didn’t quite make sense, given Bezos’s devotion to the creed of low prices and customer satisfaction. But it got at an important question: How is a company that charges low prices and has high shipping costs ever going to make money?
Amazon’s foray into other, more profitable ventures has sort of provided an answer: If it can’t make money in retail, it will make money doing other things! But, given the vast potential for growth in the e-commerce sector, and Amazon’s hold over that sector, it has remained a stubborn problem.
With the Prime price increase, Amazon will reinvest the $2 billion in extra revenue into its rapid expansion of fulfillment centers, which should lower shipping costs—and could also add value to Prime by making one-day (or even same-day) shipping more economically viable, which could then serve as a convenient excuse to raise the price of Prime once again. But, more importantly, it shows that Amazon is increasingly stemming its retail losses by essentially, as Stratechery’s Ben Thompson has argued, taxing its customers. Prime’s annual fee is perhaps best understood as a tax, a (now) $119 annual fee that allows consumers to access the store where roughly half of all e-commerce transactions in the country take place.
This is Amazon’s future, and not just in retail. As it flirts with banking and health care, the company aims to serve as a middle-man, skimming off dollars from as many online transactions as it can.
There’s a final reason for the price increase. This week Amazon announced that it was doubling its line of credit from $3.5 billion to $7 billion, which would be offset by the new revenue from Prime. Jeff Bezos may be the richest man in the world and Amazon may be on the verge of becoming the world’s first trillion dollar company, but it has not yet achieved its ultimate goal of world domination. Competitors, from Walmart and Alibaba to Google and Netflix, linger. A few billion extra dollars a year to help fight them off can’t hurt.