Will Amazon Lovers Stick With a Prime Price Hike?

Source: http://www.flickr.com/photos/aurelijus/

Source: http://www.flickr.com/photos/aurelijus/

Only months after Amazon (NASDAQ:AMZN) hiked the purchase amount eligible for free shipping from $25 to $35, the company is now considering increasing the fee of an Amazon Prime membership by between $20 and $40 due to the higher cost of shipping. The plans are not final, but CFO Tom Szkutak discussed the possible rate hike during the company’s fourth-quarter earnings call on Thursday.

“Even as fuel and transportation costs have increased, the $79 price has remained the same. We know the customers love Prime as the usage of the shipping benefit has increased dramatically since launch. On a per customer basis, Prime members are ordering more items across more categories with free two-day shipping than ever before,” Szkutak said.

“With the increased cost of fuel, transportation, as well as the increased usage among Prime members, we’re considering increasing the price of Prime between $20 to $40 in the U.S.,” he continued.

Amazon shares plummeted in after-hours trading on Thursday after the company reported fourth-quarter financial results that disappointed investors. Amazon continuously reported earnings losses during 2013, but revenue remained sky-high. Investors seemed to stay on board with that tactic last year, but now it seems as if they wish the company would pad out its margins at least slightly.

Earnings improved versus the fourth-quarter of 2012, but still missed analyst estimates by a significant margin. Fourth-quarter net income rose to $239 million, or 51 cents per share, from the $97 million, or 21 cents per share, in net income the company reported the previous year. Yet the improvement was not enough to beat Wall Street’s average estimate of 66 cents per share, and that miss prompted investors to push shares down.

Earnings have always been a touchy subject for Amazon and the company’s investors. The disparity between earnings and revenue point to a particularity of the way Amazon does business. The Internet retailer significantly discounts some of its products — the Kindle in particular — to remain competitive, and this practice eats away at its margins. With razor-thin margins, Amazon has trouble earning money.

The Prime membership, which for now still costs $79 a year, functions similarly to the Kindle in that it’s used to encourage people to buy more stuff from Amazon. If you’re already paying for a membership that includes free two-day shipping and access to the Prime Instant Video streaming service, then you’re more likely to order something from Amazon that you might have purchased elsewhere.

According to The Verge, the free shipping rate for non-Prime members was likely raised back in October in order to make a Prime membership seem even more appealing. It’s questionable how appealing the membership will remain if the rate is hiked up to $100 or more.

In addition to free two-day shipping, Prime membership also provides access to stream 150,000 movies and TV shows through Prime Instant Video, as well as allowing free borrowing for certain Kindle titles. Szkutak avoided a question during the call about whether some of those services could be eliminated from the membership to keep the price down for customers interested in maybe only receiving free two-day shipping, but could live without the streaming options. “In terms of details of how we would roll out the Prime price increase that we are considering, you have to wait on that,” he said. “Customers certainly love Prime.”

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