Written by Olivia Ritchie
The fast pace of technology growth has put online shopping in the spot light. Consumers are drawn to the convenience of shopping from their own home and retrieving their items from their doorstep. The benefit that comes from this convenience exceeds the opportunity cost of testing the product in stores or forgoing the price of shipping and handling. This puts companies, like Amazon, on the forefront of consumer convenience. They have offered Amazon Prime in the United States since 2005 and since then membership has grown to 20 million users. The program offers free shipping, free instant video access, a library lending system, and a free book download each month.
According to finance.fortune.cnn.com, “The Seattle-based online retailer sent emails to both its regular Prime and student membership program customers announcing a $20 price increase for the regular membership (from $79 to $99) and a $10 increase for students (from $39 to $49)”. The article goes on to argue that the price increase made sense due to Amazon Prime’s incredible recent growth. The company claims that this growth rate has peaked and the wiser investment would be, “spending money on better content for its video streaming services and continuing to build out its fulfillment-center infrastructure so that it can efficiently ship to every corner of the country in two days or less”. In other words, the price increase is expected to build revenue so Amazon can expand.
The graph above shows the profit margin trend that Amazon experienced from 20015 to late 2012. Profit margin is defined as the amount of revenue that exceeds costs. Amazon experienced an explosive 20% increase in profit margins in 2013, not seen on this graph. The company claims this as justification for a price increase. However, Amazon is taking a huge risk. They are raising prices without adding any additional benefits to the Prime package. According to Forbes.com, “Amazon is rumored to be getting ready to roll out a music streaming service, along the lines of Apple’s iTunes Radio as well as a set-top box akin to the Roku or AppleTV”, but this is not certain as of now. Therefore, Prime customers face a choice: pay $20 more for the same package they’ve received the past 9 years, or go without the convenience of Amazon Prime. It is, again, a cost to benefit ratio.
In my opinion, Amazon is taking too large of a risk. A 25% price increase is not something most consumers would ignore. It is clear that Amazon has created something unlike any other company with its Prime package, however, increasing the price simply because they can is not going to sit well with customers, and definitely not with any potential members.
Geekwire further analyzes the potential consequences of Amazon’s decision, reporting that, “Amazon’s rating fell from 93 percent to 83 percent in the two days following the price hike”. For company that has been known for its low prices, is this really a smart move?
WORK CITED
Duryee, Trisha. "Backlash from Amazon Prime price hike may be worse than Amazon thought, report finds." GeekWire. N.p., n.d. Web. 5 Apr. 2014. <http://www.geekwire.com/2014/reaction-amazon-prime-price-hike-underestimated-report-finds/>.
Matthews, Christopher. "Amazon Prime price increase: Why it's raising prices now." CNNMoney. Cable News Network, 13 Mar. 2014. Web. 5 Apr. 2014. <http://finance.fortune.cnn.com/2014/03/13/amazon-prime/?iid=obnetwork>.
Rogowsky, Mark. "Amazon Prime Goes To $99, Newcomers Have A Week To Jump In Before The Price Increase."Forbes. Forbes Magazine, 13 Mar. 2014. Web. 5 Apr. 2014. <http://www.forbes.com/sites/markrogowsky/2014/03/13/prime-time-amazon-gives-newcomers-a-week-to-jump-in-before-the-price-increase/>.
Cool topic! Amazon has really grown since I first heard of it. I also heard that Amazon is trying to use drones to deliver packages now. I don't know how that would work, but they are experimenting on it. It is unfortunate if Amazon is raising prices just because they can. From the outside it may seem like they are just pocketing all the extra profit, but who knows, maybe they investing in the next big thing.
ReplyDeleteI didn't even think about the opportunity cost of Amazon not having their products in physical stores; yet somehow it is outweighed by the appeal of easily shopping online. Also, a 25% increase in cost is very significant; I wonder how many costumers they lost do to that raise. It is interesting that Amazon's revenue continued to grow, despite their higher prices--which clearly proves this company is providing both goods and services that consumers are satisfied with.
ReplyDeleteI agree with you that they are taking a huge risk with the 25% increase. You can compare it to the example we had in class with the tennis courts. When local tennis courts decided to raise their prices so high for a membership that there was a tremendous decrease in members and not nearly as much financial growth as they would have liked which is exactly what could happen to Amazon.
ReplyDeleteAmazon is a big supplier to consumers because it has become to the point where taking the time to go out and shop just has become too much work. I am not a member with Amazon but now to know that they took a chance with raising it 25% why would anyone who is new want the prime package when it doesn’t seem like a prime membership anymore. I think Amazon has taken a big chance with not adding anything right away to that membership because now it’s testing how many people are willing to stay when nothing new is benefiting them. As a consumer that is what one looks at is to see the perks they could have by shopping online. I think Amazon is taking a big risk with raising and not offering something to the prime membership to keep there customers. Yes there will be people that will stay bust some will go and companies like Amazon wouldn’t want to take that chance of losing business.
ReplyDeleteAlthough I do think it is a risk for the company I think it is a smart move. If they need more revenue to expand then hiking the price up on prime members who clearly need and use this service is a good idea. As long as these members continue to save more than what there paying it is still a win-win for everyone. Those who are not benefiting will realize that this opportunity cost is too great and drop it. I do think further increases in price will have negative consequences but at this time just this one time won't be devastating I believe.
ReplyDeleteI was not even aware of Amazon Prime, but I agree that it is a risky move to increase their price by so much in such a short period of time. The company leaders at Amazon need to be aware of the changing factors of demand, such as consumer tastes. I think that online shopping could be viewed as a fad, which has the ability to lose its interest to consumers in the new future. If and when consumers decide that they like to go to a physical store more than shop online, the demand for products such as Amazon Prime will decrease. Plus, just by increasing their price, they are decreasing the quantity demanded. These two factors put together could potentially harm the business of Amazon Prime and put them behind on number of users. Great idea Liv!
ReplyDeleteIt's interesting to see how the increase in demand of Amazon Prime caused the company to automatically increase their price in hopes of higher revenue. Like Lauren said, this could have some negative effects. Sure higher revenue sounds great in theory, but if the price continually increases some may not think the benefits outweigh it anymore and will find somewhere else to shop. Sure I would be fine with spending an extra $10 on a product I really liked but if I was suddenly forced to pay an extra $50, it definitely would not be worth it anymore.
ReplyDeleteI would definitely agree that raising prices on a product that won't be improved is a risky move, especially in the eyes of the customers who have been with Amazon for a number of years. It would be easy to predict a loss in customers but it's amazing that they lost 20% in two days already. I wonder if this increase in price for the prime package will increase or decrease their revenue overall in the next few weeks?
ReplyDeleteWhile an increase in prices may seem like a bad move on Amazon's part. It becomes a balance of how they would increase or improve their services so that the cost-benefit ratio returns to the original value or even becomes more enticing to customers. As you mentioned in the article, before the price hike, Amazon had a 93% satisfaction rate and I'm sure that they have economic policies that will help them return to that number. This company didn't rise up beyond the rest by ignoring their customer's complaints.
ReplyDeleteThere will be a certain loss of customers in the short run for customers from amazon however in the long run this amount of customers will come back to the equilibrium point meaning that they will lose little. Raising the prices is an interesting move on Amazon's part seeing that so many people use them and they always pronounce low prices so that people do use them. However, in this economy we can see that the reason they are raising prices is because of the low economy.
ReplyDeleteIt is amazing how lazy consumers are. They would rather pay a fine for shipping and handling rather than getting into there cars and driving down to the library. I would definitely agree that raising prices on a product that won't be improved is a risky move. It is just amazing to me how much the middle man makes off of other people being lazy. This was a great writing topic though.
ReplyDeleteI think Amazon right now is simply trying to find the intersection between supply and demand - apparently they think their price was below the intersection and creating consumer surplus. I'm guessing that if they start seeing a drop in subscriptions, they'll settle on a more palatable price to hone in on that spot where no consumer surplus exists. Also, this was really well written!
ReplyDeleteI understand that Amazon is taking advantage of their consumers dedication to their company. As an Amazon consumer, it's true that people are willing to pay the extra few dollars in order to get what they want when they want it. Like Ryan mentioned, if they see subscribers dropping it would it would be wise for them to reconsider the price shift While they are doing what they can in order to increase their revenue, Amazon is truly a big name business and will still bring in quite substantial benefits without the increase.
ReplyDeleteI think that Amazon is doing this type of thing, because they know that if they raise the price on shipping and handling, they know that the consumers are going to keep coming back no matter what. I, personally, really don't think it's a bad idea that they raise their prices, because if the people are still willing to pay, then they are just making more money for their company in the long run. It's up to us consumers whether or not we want to fight this raise, and buy from them less, or feed into their idea, and continue to buy from them, even with the higher prices. I think this was a great topic to discuss, as a lot of us probably do buy from Amazon, including myself.
ReplyDeleteI can understand why Amazon would want to raise their prices, and for me personally even the extra $20 is worth the benefits. However, I'm concerned that they also want to raise prices for their student program. The whole point of the program in the first place is providing discounted service to students who don't have a lot of spare money (if any) to begin with; even $10 can make a huge impact on a student's budget. College is already over-priced as it is. We don't need services meant to assist us to get more expensive, too.
ReplyDeleteI agree with Amazon on why they would raise their prices but I personally do not agree with a 25% increase is not worth it. If Amazon continues to jack up their prices every few years someone else will design a website that does nearly the same exact thing as them and they will go out of business. For them to raise the price of all memberships including students is not that great of an idea because like Alex said above; most college students don't have extra money to spend on a membership.
ReplyDeleteIt is completely ridiculous that Amazon would increase another 25%, considering it is a huge risk in potential customer loss. I wonder if they know what good financial moves to make since they are known for their low prices and hiked it up quite a bit. Some might say that they need more money for the testing of the drones, to bring a package to houses faster, which in my opinion sounds terrifying.
ReplyDeleteAmazon might be taking a risky move in the 25% increase right now they are at the forefront of online shipping but as shown by many other companies this can change in an instant so this price increase will weaken their customer base allowing smaller companies offering similar products and benefits to swoop in and gain some attention this greed move may cost them or it will benefit them only time will tell.
ReplyDeleteIt doesn't seem like a smart move with much benefit raising the prices so high. The average consumer won't always notice a 10% increase but 25% is large enough where it will catch their attention which was seen in the 10% lower ratings 2 days after the change. That drop doesn't surprise me at all and if I were an Amazon consumer, I would have a problem paying so much more. For me, that benefit is far below the costs. I think the risk they're taking is to large.
ReplyDeleteGoof, "The graph above shows the profit margin trend that Amazon experienced from 20015 to late 2012." interesting topic lots of numbers, and graphs
ReplyDeleteIt's very common for companies to do this so that they can expand and make more money. I've used Amazon before but I'm not a part of their membership or anything like that. To me, this seems smart. If people like Amazon enough, they would be willing to pay the extra money for membership. To most people, the marginal benefit is greater than the marginal cost so they wouldn't mind the price increase.
ReplyDeleteI really liked this article! Amazon is a company that almost everyone uses, yet most people do not think far into. In recent years, even just being a student, I know that the popularity of Amazon has risen drastically with the rising popularity of online shopping. I also know a lot of people that are members of Amazon Prime that love it. But in all honesty a 25% increase in price is actually a large amount, and I think you’re right, with the increase in price will be a decrease in satisfaction and potentially the number of members.
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