Amazon Is Jacking Up the Cost of Prime, and It's Still Cheap

A blog about business and economics.
March 13 2014 12:20 PM

Amazon Is Jacking Up the Cost of Prime, and It's Still Cheap

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Hey, it costs money to get you that package so fast.

Photo by Matthew Lloyd/Getty Images

Well, it couldn’t last forever.

For the first time since it introduced the service in 2005, Amazon announced this morning that it will increase the price of its unlimited two-day shipping service, Amazon Prime, from $79 to $99 per year. There will be carping and maybe a few canceled accounts. But this was inevitable.

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The fact that Prime has stayed as cheap as it has for so long is one more small testament to Jeff Bezos’s willingness to sacrifice short-term profit margins to lure long-term customers. If you only adjust for inflation, a $79 Prime account nine years ago would be worth $94 today. Unlike when it debuted, subscribers also get access to Amazon’s library of streaming TV and movies. As the company has noted, shipping costs are up—the price of diesel fuel for trucks has just about doubled since 2005. And finally, it says subscribers are using the service more often, which by default makes it more expensive for Amazon to run. It costs more to serve up an all-you-can-eat buffet when the diners start pigging out.

From a customer acquisition standpoint, holding back on the unavoidable price hike seems to have been a success. Though it doesn’t share specific figures, Amazon has hinted that Prime has at least 20 million members worldwide. And according to one estimate, those users spend an annual average of $1,340 each. 

But the suddenness of the increase also illustrates that there’s a downside to keeping a service the same price over the years come hell or high fuel costs. I doubt too many customers would have suffered horrible sticker shock if Amazon had gradually raised the price of their Prime account by a dollar or two every year. We adjust to inflation all the time. But instead, it’s slapping some customers with a sudden 25 percent increase (subscribers whose accounts were set to renew before April 17 will still pay the old price).

That said, we’re still talking about a service that is probably vastly underpriced. Though they don’t have exactly the same libraries, a Netflix subscription alone comes out to about $96 a year. And consider the retail competition: At Walmart, three-five day shipping on small orders costs $6.97, 7 percent of a whole Prime membership. Fueling up a shipping truck isn’t exactly cheap. 

Jordan Weissmann is Slate's senior business and economics correspondent.

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