Amazon.com (AMZN), which yesterday reported disappointing earnings, is faced with a dilemma regarding Amazon Prime, its popular $79.95 per year service that gives customers free two-day shipping as well as access to video content and a library of e-books.
Amazon Prime reportedly has more than 10 million subscribers, who tend to be more frequent shoppers than people who don't have the service. Though the deals for customers can be sweet, they come at a high price. The world's largest e-commerce company is considering raising Amazon Prime fees by 40 percent to 50 percent.
Amazon shares fell 11 percent to $359 on the day.The Seattle-based company and some Wall Street analysts have argued that customers will absorb the higher costs because, in the words of Amazon CFO Tom Szkutak, "it's a great value for customers."
Others are not so sure.
"I certainly think there is a risk of alienating their current member base," said Michael Souers, an analyst with S&P Capital IQ who downgraded Amazon.com today to a "sell" from a hold. "That rate of growth is certainly going to start to show decreases going forward."
Amazon described its sales during the recent holiday season as "record setting" and noted that more than 1 million customers signed up for Amazon Prime during the third week in December. The company doesn't provide more expansive data about Amazon Prime, though Morninstar analyst RJ Hottovy estimates that the number of Prime members more than doubled in 2013.
How the price hike might play out is hard to analyze since
Amazon doesn't provide investors with a tally of Amazon Prime customers. Although the company's stock price is up more than 30 percent over the last year, there are signs the company
Heading into the holiday season, Amazon raised the threshold at which companies can get free shipping from $25 to $35. Given the billions Amazon is spending on new fulfillment centers, many people get their merchandise fairly quickly even if they don't subscribe to Amazon Prime
"This is the first quarter in a long time they didn't even meet the Street's top-line expectations, and I don't think it's a coincidence that they increased their shipping threshold this same quarter," said Sucharita Mulpuru-Kodai, an analyst with Forrester Research, in an email. "Amazon needs to be very careful about price increases of any sort -- it is risky, particularly for a brand which has built its reputation and customer base on value."
Indeed, Neftlix (NFLX) went into a tailspin in 2011, losing 80,000 customers, after it raised prices for some customers by as much as 60 percent. The online TV and movie company was forced to abandon its plan to spin-off its DVD rental business because of the blunder.