Amazon.com, Inc. (NASDAQ:AMZN) announced last week that it is raising the monthly subscription price of Prime, and now an analyst team has put some numbers on it to put things into perspective for investors. Of course, the annual price isn’t changing, so it’s difficult to know what the real impact will be.
Amazon Prime price increase
The company raised its monthly Prime price from $10.99 to $12.99 per month for regular subscribers and from $5.49 to $6.49 per month for students, but the annual subscription price remains at $99, at least for now. Bank of America Merrill Lynch analyst Justin Post said in a note to investors that he expects Amazon to raise the annual subscription price for Prime at some point too.
He estimates that at least 80% of Prime subscribers are already on a monthly subscription because even before the price hike for the monthly plan was announced, it was cheaper on an annual basis. He notes that the last time Amazon raised the price was in 2014, and since then, the company has added more digital video content, Prime Music and other bonuses. He expects this year to bring the integration of Prime into Whole Foods.
Almost $240 million in revenue possible from Prime price increase
He also believes that Prime adds accelerated last year because subscription revenues accelerated. He estimates that Amazon ended the year with almost 105 million Prime subscribers, including 61 million in the U.S. and 44 million overseas. BAML’s e-commerce survey revealed that 64% of U.S. respondents live in a household that subscribes to Prime, versus 53% in the fourth quarter of 2016. Further, Prime members spend 2 to 2.5 times what non-Prime members do on Amazon. The online retailer ended the third quarter with a run rate of $9.8 billion for subscription revenue, which Post said also supports his view that memberships accelerated in 2017.
The BAML analyst said that if the higher monthly price affects only domestic subscribers, then about 10 million members may be affected, which could bring in almost $240 million in incremental revenue annually. He noted that Amazon could see better margins and profitability due to the price increase, but he does expect some level of churn from it.
Amazon could struggle against Walmart due to Prime price increase
Post noted that many members may simply switch from the monthly plan to the annual one. He feels Amazon may be trying to press for this because Prime members spend more and because some members might only sign up for Prime during the holiday season.
However, he also drew a comparison between the Prime price increase and Netflix’s price increases in recent years, noting that churn tends to be higher among monthly subscribers in general. After the price increase, the annual price is 36% cheaper than the monthly plan. He also warned that the price increase could make it more difficult for Amazon to attract new shoppers from the lower income brackets because they may not be able to commit to larger annual fees.
He also highlighted the importance of lower-income shoppers as the online retailer increasingly faces off with Walmart, which has become an even greater competitive threat domestically.
Amazon stock jumped by more than 2% in intraday trading on Monday, rising to as high as $1,324.84.