Last week Amazon announced they are considering increasing the price of their popular Amazon Prime service by $20 – $40 over the current $79 price. This isn’t really a change in their pricing strategy, but rather signaling an adjustment to their price to better reflect the value of the service. If you are responsible for pricing in your own enterprise, you should pay attention to Amazon’s moves and consider how the lessons of the Amazon effort can apply to your pricing environment.
Amazon launched the Prime service 9 years ago, initially offering free shipping on 1 million items. Since then Amazon has added 18 million items eligible for free shipping and included Instant Video and a digital library for Kindle owners, all in an effort to make customers more loyal and generate more sales. In my opinion, their pricing strategy has been working, and there is room for adjusting the price of the service.
Amazon has said there are tens of millions of Amazon Prime members, and according to Morningstar, those members tend to spend twice as much as non-Prime members and also purchase pricier items. Of course it is not clear if they buy more and pricier products because they are Prime members, or they became Prime members because they were buying more and pricier things. If the first statement is true, the strategy is a big win, however if the customers became Prime members after they were already big spenders on Amazon, the strategy will have cost them money. I don’t have the data to know for sure, but I am sure Amazon has done the analysis, and their growth rates indicate significant increases in sales per member, much of those undoubtedly because of Amazon Prime.
To me, the real story is the adjustment of price to value. The first and most obvious area of value is free shipping. Amazon has said the costs of fuel and shipping have increased over the past 9 years, and the price of Prime has not kept pace. I understand their costs have gone up, but let’s think about the value to the buyer. If I order once per month from Amazon and receive free shipping, I would save more than $79 compared to paying for shipping each time. Depending on what I purchase, shipping would probably range between $6 and $20. If I assume an average of $7 per shipment (probably low), it would be worth $84 per year to me for free shipping.
The next area of value is Amazon Prime Instant Video. Clearly there is value to having access to a catalogue of movies, TV shows and other videos. Netflix currently charges $8 per month for instant video, but to assess whether Amazon Prime Instant Video is worth that much, we would have to evaluate their catalogue compared to the Netflix catalogue. I have not compared them, but I doubt the Amazon catalogue is better, and if not, the upper limit on Amazon’s offering is $8 per month, but probably less. As an example, I have been a member of Prime for some time, but I have never used Instant Video. I really need to try it, though.
A third area of value is for Kindle device and app users. Kindle First allows members to download one of four Editor’s Choice books each month either for free or at a significantly reduced price. I generally take advantage of this each month, and although I may not purchase one of those books otherwise, there is some value there. If I conservatively assume I would only pay $2 for each of those books if not for Kindle First, that is still worth $24 per year to me. Amazon also offers a Kindle Owners Lending Library, where Kindle owners can borrow e-books in the library for free. Personally, I can’t take advantage of this because I use the Kindle app on my iPad, and the library only works with actual Kindles. For anyone with a Kindle, the Lending Library should easily be worth 1 book per month at $2 each, so $24.
I have touched on sources of value in a number of blogs. At the risk of being repetitive, I think Amazon’s moves make it worth discussing again. Amazon has been very good at using their analytics to support their pricing strategy and find opportunities to generate more sales or increase margins. We should all pay attention and see what we can learn from them. As Pablo Picasso once said, “Good artists copy, great artists steal.” We should copy or steal Amazon’s approach and identify the total value our products bring to customers and make sure our prices are aligned with that value.
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