Amazon's Prime fee hike: Is this just the beginning?

Consumers may need to get ready for rate increases every few years as Amazon races to add services and programming to justify the hikes.

An Amazon fulfillment center. Andrew Yates/AFP/Getty Images

It took Amazon nine years to raise the fee for its Prime premium membership. It won't take nearly as long for the next price hike to show up.

Amazon's $20 increase in its fee sets a precedent for the company to raise its fees in the future, with the company having laid out the argument that it is facing rising fuel and transportation costs. It won't come without benefits, as Amazon races to add services and other perks to justify the increases. And the company will likely tread cautiously, sensitive to upsetting its most loyal of customers. But ultimately, those rate hikes will come, and likely at a much faster rate than before.

Amazon could see price hikes every three to five years, although it's hard to pin down the exact window for increases, according to Neil Doshi, an analyst at CRT Capital Group. He doesn't believe they'll come every year.

"At the end of the day, [CEO] Jeff Bezos wants to do what's best for the customer and if they increase this every year, it becomes challenging for consumers to ultimately recognize the value from Prime," Doshi said. "But if they do it every few years and basically attribute it to rising transportation costs, then it becomes a little more palatable for consumers to swallow."

Amazon's official reasoning for increasing the price has been transportation costs, but the company has been quick to point out that the service has grown way beyond its initial free two-day shipping selection of 1 million products.

When asked about future fee increases, Amazon spokeswoman Julie Law said the company had no news to share, but promised more benefits were on their way. The Prime subscription currently features 19 million Prime-eligible products, unlimited Prime Instant Video streaming, e-books through the Kindle Owners' Lending Library and free Sunday shipping.

"And we're not done...We plan to continue to add more and more value to an Amazon Prime membership over time," Law said. This includes adding more products eligible for the free two-day shipping, and a improved shipping process.

Amazon has been rapidly adding more fulfillment centers across the country to ensure shipping can be as fast as promised. A previous report suggested that Amazon could be building its own delivery fleet in order to avoid relying on shipping partners. (Sorry, still no drones yet).

At $99 a year for full membership (students get a discounted rate of $49), the monthly fee is roughly $8.25 a month. People who consistently use all the various services, or heavily rely on the two-day shipping, will probably say it's still a great deal. But others may take some convincing.

That's where Amazon will have to deliver. Shipping is still the most sought after benefit, but the company is expected to roll out a music streaming service, or possibly a gaming service, soon. Amazon has been in talks with music industry executives for some time now and music-streaming would help them get in line with competitors like Apple and Google. After it acquired game developer DoubleHelix, a company that's known for a free-to-play console game, there was renewed speculation in the development of an Amazon gaming console.

Doshi said those services could add the right value for customers, but it won't be the actual selling point for Amazon when it raises its prices again. It will need to stick to its message of increased transportation costs because it's a reason customers can stomach, he said. If Amazon, for instance, says it's adding $20 to your fee because it's adding music-streaming, customers could easily say they don't want it then.

Amazon will also have to deliver on video content. It's been making big bets on original programing to challenge Netflix for its video-streaming crown, and the initial results show it may be paying off. The company said previously that millions of its Prime memberships in the last half of 2013 were a result of customers who signed up for the video service primarily, but then used Prime shipping out of convenience.

While Amazon will likely have everything in place when it asks for its next fee increase, there will be another challenge to face: convincing customers any service is worth more than $100. Keep in mind, the company had also considered a $40 increase to $119.

"As long as they can continue to add value to Prime, just from a psychological standpoint, $99 doesn't seem too bad," Doshi said. "I think once they start moving into triple digits, people will start to consider the number of services...if Amazon had increased it to $119, it would force a lot of people to think about Prime and how much value you're getting out of it."

Correction, 4:42 p.m. PT: This story initially misstated the new price of the Amazon Prime fee. It will be $99 a year. Also, a quote from Neil Doshi has been corrected to read "As long as they can continue to add value to Prime, just from a psychological standpoint, $99 doesn't seem too bad."

 

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