I'm sure that we're some of the reason that Amazon loses over a billion dollars on Prime every year. For instance, the cheap earphones I'd passed down to the kids so that they could listen to audiobooks on my old iPod finally broke, so rather than go out to the store I got on Amazon, picked out a nice pair for $15 (which would have cost me much more in store) and they showed up two days later to the kids great delight. The fact that it's a pain for us to get out the door to go shopping, especially for something that we'd have to drive down into Columbus to buy, means that free second day shipping is a huge value for us. (And we even end up using the discounted overnight shipping a lot for last minute birthday presents and such.)
As such, I was rather chagrined to read that Amazon is thinking of raising the price on Prime by $20-$40 in the near future. The feedback has been overwhelmingly negative, and I myself have wondered if we should cancel if it happens. However, reading Rafi Mohammad's piece on pricing Prime in Harverd Business Review, I think I probably disagree with his alternative suggestion.
The solution to Amazon’s pricing dilemma is straightforward: unbundle the components of Prime. By unbundle, I mean instead of making a “take everything in the package or leave it” price hike, allow customers to purchase what works best for them.
Much like cell phone carriers serve customers with varying usage needs, Prime should provide different shipping options. The premium option can be the current unlimited service, albeit at a steeper price. A lower-priced option could require a purchase minimum of, say $25, to get free two-day shipping. This will curb shipping losses from irksome small dollar orders such as $5 scissors. Another variant is to offer a classic two-part fixed/variable pricing strategy. For instance, there could be a $50 annual Prime membership that gives members the right to receive two-day shipping at a variable price of $1 – $2 a package.
Given that streaming and the Kindle library have little to do with shipping, there’s no clear reason to include them in the Prime bundle except to elicit a “wait, there’s more” urge to buy. Why not simply offer streaming and the Kindle library a la carte or as an extra option to those who purchase a shipping option?
Unbundling Prime and providing choices better serves customers, which increases the popularity of this critical growth program. Amazon’s challenge provides two key pricing lessons to all managers. First, understand and respect that customers have different needs. One price does not fit all – provide pricing options to serve the diverse needs of customers. Just as importantly, when implementing a significant pricing increase, it’s critical to offer customers lower priced options. No one likes “take or leave it” ultimatums.
The reason, from Amazon's point of view, for keeping Prime bundled is that it allows them to get people used to extra value. Take the instant video streaming service. We already subscribe to Netflix, and the things available overlap to a great extent, so I don't think I would have ever tried Amazon streaming if it hadn't been included in Prime. As it is, though, they selection is slightly different. (For instance, the had the BBC production of Emma on streaming while Netflix did not.) And so we've gradually fallen into using it more. Now I'd be more inclined to drop the Netflix streaming and pay for Amazon if they split it off into a separate service from Prime, but the key is: I never would have got to that point if they hadn't offered it as a free service to Prime members for quite a while.
Offering free add-on services to Prime rewards Amazon's most loyal and profitable customers, and it encourages those customers to broaden the number of services they turn to Amazon for. Splitting Prime into a set of a la carte options would probably significantly slow adoption of new services which Amazon would like to launch.
The one split out that would potentially work would be if there are a small number of users who are having a massively disproportionate effect on the cost of Prime by shipping huge numbers of items. (For instance, people who are doing ordering for some kind of small business.) If 10% or less of Prime members are accounting for a huge percentage of the shipping costs, and if it's possible to come up with a way to charge for for "unlimited two day shipping" versus some sort of more modest plan like "50 free second day shipments a year, with additional shipments at $2.99 each" or "unlimited free 5-6 day shipping and 25 free 2nd day shipping credits per year" I think that could potentially work as a segmentation. However, while as a consumer I'd happily not have have to pay for the Kindle lending library (I don't own a Kindle), I think that in general Amazon would probably not be well served by segmenting their Prime offering.
As for the size of the increase: They're going to face major backlash when they increase Prime pricing regardless, so it's probably a good bet for them to make a price increase such that they won't have to do it again for another 5-7 years. In that sense, it's probably smart to do a single $20-40 increase and deal with whatever percentage of people actually cancel (probably much smaller than the number who say they'd cancel), than to set themselves up for having to do smaller price increases every 2-3 years and deal with the backlash each time.