Amazon.com Inc. (AMZN), the world’s largest Internet retailer, boosted the price of its Prime membership by 25 percent to $99 a year, the first increase since the service’s introduction nine years ago.
The new Prime Fresh, a same-day local delivery service offering groceries and other daily necessities, will remain at $299, Amazon said on its website. While current Prime users will continue receiving the service, Amazon said it is e-mailing customers with renewal dates for their membership.
The Seattle-based company said in January that it was considering boosting the price of Prime, a service that provided fast shipping and video streaming for $79 a year. Chief Executive Officer Jeff Bezos has used Prime to draw in millions of new customers -- and keep them buying from the site with the promise that goods would arrive quickly at their homes.
Yet Amazon’s willingness to gain customer loyalty by shouldering the costs of nationwide shipping and access to online movies has reached a limit as its expenses climb. Bezos has been pumping money into initiatives such as drone delivery and more warehouses, even as sales growth has slowed. In the fourth quarter, net shipping expenses jumped 19 percent to $1.21 billion.
Amazon shares rose less than 1 percent to $371.51 at the close in New York. The stock is down 6.8 percent so far this year, compared with a drop of less than 1 percent in the Standard & Poor’s 500 Index.
John Blackledge, an analyst at Cowen & Co., wrote in a note today that Prime’s price boost is an “incremental positive.” He estimated Amazon has 23 million U.S. Prime members, with the $20 price increase set to generate $460 million in additional revenue.
“We expect continued growth of Prime members, despite the price increase,” he wrote. “Purchases are habitual and are not impacted by seasonality for Prime members at this point.”
Price increases have sometimes backfired on technology companies. In July 2011, Netflix Inc. raised prices for its streaming and DVD services by about 60 percent. In the third quarter that year, the Los Gatos, California-based company lost 800,000 U.S. subscribers.
In its e-mail to Prime members about the price rise, Amazon said fuel and transportation costs have increased. The company also highlighted how the number of items eligible for fast shipping has reached more than 20 million, up from 1 million in 2005, and said members have unlimited access to more than 40,000 movies and TV episodes, as well as more than 500,000 digital books.
Emily Janzer, 24, who is a Prime subscriber, said she initially thought about not renewing the service because of the new $99-a-year fee. Yet after looking at her Amazon order history over the holiday season and calculating what shipping would have cost her without Prime, she has decided to stay put.
“It would have still been worth it for $99,” said Janzer, who uses Prime to buy gifts and household goods. “I’m going to keep it, unless something else changes.”
Some Amazon competitors used the e-commerce company’s price boost to reiterate that they were maintaining their shipping rates.
“As another online bookseller announces higher membership fees, the Barnes & Noble Member program maintains its very low annual fee of $25, which includes unlimited free express shipping with no minimum purchase at BN.com,” Jaime Carey, Barnes & Noble Inc. (BKS)’s chief merchandising officer, said in a statement.
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