Amazon Prime Rate Hike: Lessons Learned From Other Retailers

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William Blair & Company analysts Mark Miller, Ralph Schackart, Mike Signore, and Craig Magill take a close look at, Inc. (NASDAQ:AMZN)’s probable increase in membership fees to their Prime service.

Amazon prime membership price hike

We have received investor questions about, Inc. (NASDAQ:AMZN)’s announcement of a potential “$20 to $40” increase in the $79 Prime membership and lessons learned from the evolution of the membership program at Costco Wholesale Corporation (NASDAQ:COST) (COST $112.36; Outperform) over time.

Higher membership fees do not necessarily affect member retention. In fact, as exhibit 1, on page 2, highlights, Costco Wholesale Corporation (NASDAQ:COST) has experienced no discernable impact on its membership renewal rates following its membership fee increases in 2000, 2006, and 2011.

Sam’s Club, owned by Wal-Mart Stores, Inc. (NYSE:WMT) (WMT $74.68; Market Perform), does not disclose its renewal rates, although we perceive that the company has experienced some negative impact in renewals related to its fee increase in 2013. Why the divergence? Costco Wholesale Corporation (NASDAQ:COST) consistently scores higher for customer satisfaction, so its members simply may perceive greater benefits of the membership.

One of the lessons learned from Costco is that the incremental savings provided by the Executive Membership have driven a significant increase in household spending at Costco. Since the launch of the Executive Membership program, spending by Executive members has increased from an estimated 12% of total merchandise sales in fiscal 2001 to 47% in fiscal 2013.

Despite the higher fee for Executive Membership at Costco Wholesale Corporation (NASDAQ:COST) (versus Gold Star), more households have aligned with Costco as their buying agent. By adding greater value into the program with the 2% rewards program, Costco has created a clear incentive for households to spend more at the club.

Amazon ecosystem, Inc. (NASDAQ:AMZN)’s challenge will be to convey to current and prospective Prime members that the value of the membership is incrementally greater. Based on our field research, Prime members save several percent on purchases (with lower shipping fees) versus non-Prime customers, in addition to the digital content in the, Inc. (NASDAQ:AMZN) ecosystem and guarantee of two-day delivery.

Amazon earnings

We believe the announcement of the prospective membership fee change contributed to the 11% slide in Amazon’s share price following the fourth-quarter earnings release. Is this a misstep by management? Or will Amazon reinvest the fee increase to drive greater scale benefits across the platform? Our belief is that there will be minimal churn in the Prime member base, and more households will align with, Inc. (NASDAQ:AMZN) to do more of their shopping with, Inc. (NASDAQ:AMZN). Today these two Seattle-area companies celebrate the Seahawks’ success; tomorrow they may share the secrets of their companies’ success.

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