Anatomy of a Price Increase: 5 Points About Amazon Prime

No matter how hard the marketplace tries, it cannot wish away the concept of price increases. It can, however, hold businesses accountable for the way they develop, present and execute those changes to price structure.

While it ultimately recovered, Netflix lost considerable momentum when in 2011 it stopped bundling its streaming and mail services (and thus effectively raised the price of its offering). Its stock plummeted.

It did not necessarily make friends in the process, but competitor Redbox avoided controversy by more masterfully executing its own 2011 change to the pricing structure.

Upon learning that Amazon will soon raise the price of its annual Prime subscription by $20 (to $99/year), current customers reacted with predictable polarity. Some, believing the service still represents a steal at that price, reiterated their commitment to the brand. Others, unconvinced by the value of Prime, have declared their intentions to cancel.

Investors have thus far sided with the glass half-full crowd. While the overall Nasdaq was down by 0.5% at press time, Amazon’s stock value increased by almost 2% in the immediate wake of the news. The market does not see Amazon’s move as a mistake, let alone one of Netflix proportions.

But does that mean it was handled perfectly? Does that mean it will not come with any consequences (to both perception and financial outlook)? Consider these five elements of the Amazon Prime Price increase.

1) Amazon had warned of the possibility

While the Netflix debacle caught customers by surprise, Amazon had been transparent about its impending pricing change. Speaking to investors earlier this quarter, Amazon actually revealed that it was considering an increase of $40/year. Considering what could have been, the $20 increase seems like small potatoes.

2) This is a reactionary change – Amazon is not promising more value

Price increases might be inevitable, but they are easier to swallow when chased with improvements to the product. Amazon is not offering that.

While media reports suggest Amazon might be adding a streaming music service to its Prime offering, the company has not confirmed that rumor as reality for customers. Its e-mail confirming the pricing increase, in fact, offers no assurance that Prime will become tangibly, let alone significantly, better once the pricing switches to $99/year.

The announcement instead focuses on natural inflation, past value adds (including the introduction of its video streaming service and a twenty-fold increase in the number of products available for free shipping) and past changes in the cost structure.

Because Amazon kept prices steady despite nine years of cost increases and value adds (which should have brought the tab to over $100), the release effectively argues that customers should not feel slighted by this change.

Is that a logical assertion? Should customers feel obligated to "rebate" Amazon for nine years of steady pricing? Or should customers expect Amazon to deliver new value alongside the price increase?

3) But it is reaffirming the value

A change to the individual services rather than the bundle itself, Netflix’s price "increase" read as such because value was being removed (even though the price for streaming-only service was actually shrinking). Regardless of whether a customer loved or hated the DVD-by-mail service, it was no longer standard in his package. In order to take advantage of that offering, a customer would have to send Netflix more money.

Instead of revealing services customers will no longer receive, Amazon’s release focuses on all the value they will continue to experience. While some of the features—be it Kindle book rentals, video streaming or the free shipping—will not resonate with all customers, their collective inclusion in the release emphasizes the value of the Prime offering.

In that sense, Amazon’s announcement functions as a "remarketing" email to remind customers of the value they are receiving and inform them of services of which they should be taking advantage.

4) Customer acquisition trumps retention

By maintaining its current $79/year pricing through March 20, Amazon creates urgency for prospective customers. One who had been considering Prime knows he has precisely one week to pull the trigger. Unless a prospective values his further contemplation at $20, he has a clear incentive to register immediately.

The announcement could be a boon to customer acquisition.

Amazon is not, however, using the increase as an opportunity to boost customer retention. No customers will be permanently grandfathered at the $79 rate, and only those whose subscriptions expire before April 17 even have the opportunity to pay $79 for the coming year.

Years of loyalty mean nothing in this scenario. Whether you started subscribing in 2008 or plan to start doing so in May 2014, you will be asked to pay the new rate.

5) It sets a troubling precedent but reveals a welcome habit

On the one hand, Amazon’s price increase risks setting a bad precedent. If it is now willing to raise the price of Prime, what is to stop Amazon from again doing so in future years? And if it believes customers should effectively "rebate" Amazon for the added services they received in the past, will it no longer make as many complimentary improvements to the offering?

On the other hand, Amazon’s price increase reiterates the extent to which this is an anomaly. Despite nine years of cost increases and value adds, Amazon is only now parting with its initial pricing structure. The reiteration of that scenario is tantamount to affirmation that the company is not quick to pull the trigger on price hikes.