Why is Amazon raising the price of Prime and does it need to?

Amazon last week announced it was raising the price of its popular, on-demand delivery service Prime for the third time in the division’s history, costing US consumers $139 annually instead of $119.

The news came at the same time the world’s largest ecommerce site announced its annual revenue had climbed to $31.95 billion (£23.6 billion) from $26.54 billion ($19.6 billion) in 2020, prompting an outcry from consumers asking why they need to pay extra for the service.

While consumers may have a grievance with the ecommerce mammoth and its decision to up the price, there are a number of reasons why it has done so. These includes rising operational costs as well as the fact that the Prime service is a victim of its own success, with Amazon consumers now used to getting their products within a matter of hours.

Amazon currently has over 200 million Prime subscribers worldwide and registers $25.21 billion in annual revenue from retail subscription fees, according to backlinko.com.

The sheer size of the operation is testament to the service’s efficiency in delivering a service that consumers are willing to pay for.

“Amazon’s price hike for Prime in the US is a sign of their confidence in the proposition,” digital transformation consultancy Publicis Sapient‘s head of retail EMEA Julian Skelly told Charged.

Rising costs due to the global supply chain industry have also been cited as one of the main reasons for the hike in the cost of Prime, with experts saying that the pandemic created the perfect recipe of ingredients for the crisis to unfold.

Amazon was also hit hard by the post-pandemic labour crisis which followed the increased demand for better work-life-balance and employee benefits.

READ MORE: Amazon deploys its telehealth service Amazon Care across the US

The company had to increase its average starting wage for warehouse and transportation workers to $18 an hour last September, as it scrambled to hire 125,000 new staff. It also started offering obscene starting bonuses for new employees as part of a desperate bid to attract new staff, with some bonuses reaching up to $3,000.

Amazon’s vice president of delivery services Dave Bozeman said at the time: “It’s a tight labour market, and we’ve seen some of that, as the entire industry is seeing.

“The 125,000 (warehouse workers) is really to help us keep up with our growth.”

Skelly believes that this has been one of the fundamental causes of the hike, saying: “There is no doubt in their claims that the increase reflects the increase in wages and transportation costs.

“All online retailers are suffering from this and Amazon made significant investments in 2021, which they have to recoup.”

A survey conducted by Oracle found that 45% of US consumers admitted to never thinking about how their products were made and delivered before the pandemic. So while consumers may be annoyed at new Prime price, it is unlikely they fully understood how the service managed to keep delivery an efficient service pre-pandemic.

Ohio State University Keely Croxton told the Guardian: “You have a supply chain that has been built on a premise of being lean and efficient and that works great when things are operating smoothly.

“But as soon as there’s a glitch in the supply chain, these lean supply chains become brittle and break.”

Despite the success of the service globally, consumers are still undecided as to whether they believe the price they pay at the moment is worth it. A study conducted by Charged revealed that only 28% of respondents believed Prime to be worth the price increase. Some 72% thought that it was already expensive enough.

This is despite Amazon’s best efforts to convince its consumer base otherwise, fuelling millions of dollars into its entertainment division. The company defended the rising costs in its earnings call, pointing out its array of premium content including Amazon original programming and the upcoming release of The Lord of the Rings: The Rings of Power.

Skelly believes that consumers are planning on spending even more than they did online this year, explaining his research shows that – even following a year of growth – consumers are still planning to spend more online in 2022.

“The increase in the subscription cost will probably not impact volumes,” he stated.

“Rather it will encourage Prime subscribers to channel more of their spend Amazon’s way – maximising the value of the $139 annual cost. Customer behaviour is similar outside the US, so we can expect to see a similar hike in the costs of Prime in the UK later this year.”

There’s little doubt that consumers will continue to use Prime, according to Skelly. “They wouldn’t have made the change unless they believed in the strength of consumer demand for Prime.”

Ultimately, and while consumers may disagree with the price increase, Amazon has realised that in order to keep providing the service that has become one of its most pivotal divisions, unfortunately the customer must pay the price.

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1 Comment. Leave new

  • Leslie C Bedford
    March 17, 2022 2:18 pm

    There’s more to Amazon Prime then movies and videos.I pay £79 ($104) for Amazon Prime per annum and Amazon Music Unlimited £79 per annum.

    Reply

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