In my earlier post on the Brief History of Amazon Prime, I had mentioned about the stickiness of Amazon Annual Prime Pricing.
An issue with scaling revenues this way is stickiness of prices. It took a whole nine years for Amazon to go from $79 to a more profitable fee of $99. (I thought the fees would be raised to $108 at $9 a month – closer to NetFlix rates – but the fees were stickier than I had thought).
Prime subscription prices vary quite a bit geographically around the world. For instance, the annual subscription is $99 in the U.S., £99 in the U.K. (equivalent to USD 115), $22 in Italy, and about $8 in India.
However, within certain geography (or a market), the subscription price cannot be varied even though the willingness to pay vary significantly. This is an issue with any subscription model: A subscriber may value the service significantly more than another subscriber, but they both still pay the same flat fee and enjoys (more or less) the same service.
I flagged this issue and had asked my students in Operations Class. How can Amazon employ price discrimination (or service differentiation) within Prime membership based on willingness to pay? Somewhat presciently, some students talked about monthly vs. yearly memberships. Now we have the answer directly from Amazon. Also, see TechCrunch.
To summarize the data very quickly: if you are a monthly subscriber on Amazon Prime, pricing goes up from 10.99 to 12.99 (an 18% increase). Corresponding monthly pricing for student Prime plan goes up from $5.49 to $6.49. Note that the annual subscription prices remain at $99 and $49 (for students).
Note: The very existence of the monthly plan, introduced in 2016, is a price differentiation scheme. Even at the earlier, lower price monthly subscribers were paying more than annual subscribers on annual basis ($132 vs. $99).
My (un)educated guess is that two things are at play here: (1) Churn within the plans and (2) Fences between the plans.
Churn
It is well known that retention is higher at the annual membership level. Uptake rates are very good, 73% of customers who do free trial sign up for Prime. After the first year, 91% renew subscription and after the second year, 96% renew (rivaling only tobacco and other addictive products).
In his 2016 letter to shareholders, Bezos wrote that Amazon aimed to make Prime “such a good value, you’d be irresponsible not to be a member.” Clearly, prime members love it and renew their subscription.
But, hold on. This data only goes up to 2016, and therefore covers only annual subscribers. Clearly, $99 yearly subscription is likely preferred by Amazon: (i) They have high retention rates; (ii) They do not suffer from sticker shock (of one deep payment every year, like members of platinum credit cards with annual fees); and (iii) spend twice as much as non-prime members ($1300 vs. $700).
How many prime members are in monthly subscription model? This leads to my second point.
A fence between the plans
Consumer Intelligence Research Partners (CIRP) estimates that about 26 percent of Prime members have opted for the monthly plan.
Introducing the monthly membership Prime plans has definitely helped Amazon in scaling members (through low prices as I discussed here). One CIRP study estimates that Prime members grew by 38% in one year (Apr 2016 to March 2017), some of it due to the Monthly plan.
Evidently Amazon wants to make Annual plans slightly more attractive to monthly plan users (lowering the fence between the plans). Using the data, we can triangulate to two observations:
(a) The monthly plan retention rate is likely high but bouncy. Monthly subscribers may unsubscribe during low usage months and resubscribe during high use months.
(b) The above fact, if true, implies that the total “spend” for monthly subscribers (who get the same delivery service speed) is lower than that of the annual subscribers.
Amazon clearly prefers annual subscribers and would like to treat the monthly plans as a “temporary pass-through” plan nudging users into annual plans based on their usage, and eventually into higher spend at Amazon. At 26%, the portfolio is slightly imbalanced, hence the price correction.
Coming up Soon: A view on Amazon HQ2