Amazon announced a $20 price increase for its Amazon Prime service. Does it make sense? It appears so, based on a quick-and-dirty financial analysis. First, analysts estimate that 20 million people subscribe to Amazon Prime at the present time. If they all pay the $20 price increase, that would generate $400 million in increased revenue. The key question is: How many people will drop their Amazon Prime membership because of the price increase? Does the additional revenue from the increase more than offset any lost revenue from cancelled memberships?
Here's the simple math. The increase in revenue from the price increase equals $20 * (20 million subscribers - the number of cancelled memberships). The lost revenue from cancelled subscriptions equals $79 * the number of cancelled memberships. What's the break-even point here? If the company has less than 4 million cancelled memberships, then the price increase is a net revenue generator. Do we think Amazon Prime will lose 20% of its members due to this price increase? That does not seem likely. Analysts told the Wall Street Journal that they expect no more than 10% of Prime members to drop their subscriptions.
One final note - Amazon probably is losing money on some Prime memberships, because those folks take frequent advantage of free delivery. Those heavy Prime users are not likely to cancel. They are getting a great deal. Who is likely to drop their Prime memberships? That would be the folks who are probably not using the free delivery feature very often. In other words, the lightest shoppers are the ones who may be most likely to cancel. That's good news and bad news for Amazon. It's great to retain the loyal customers who buy tons of stuff from Amazon. However, those folks also incur a great deal of delivery expenses. That leads to an intriguing question: At $99, does Amazon still lose money on a substantial number of Prime memberships due to heavy delivery expenses? It would be interesting to know!