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Is Amazon Prime’s Fee Hike a Savvy Move or a Potential Crack in its Armor?

By Tom Caporaso, CEO of Clarus Marketing

Amazon Prime’s recent decision to raise its annual membership fee probably didn’t come as a surprise to anyone within the online retail or subscription e-commerce industries. The company had been talking about increasing its subscription fees by $20 to $40 since at least January, so the biggest news might have been the price point Amazon chose.

Per the announcement, Amazon Prime fees will jump from $79 to $99 for new members and existing members who renew their subscription on or after April 17, 2014; the Student Prime fee will rise from $39 to $49 on the same date. The online retailer attributed these increases to the growing costs of fuel and transportation but downplayed the severity of 20% hikes by stating, “If you consider things like inflation and fuel costs, a Prime membership valued at $79 in 2005 would be worth more than $100 today.”

Paid loyalty is the best kind of loyalty, and since its launch in 2005, Amazon Prime has offered plentiful evidence to support that belief. Prime customers spend an annual average of $1,340 with the retailer, more than two-and-a-half times the $529 that non-Prime customers spend with Amazon every year. Better still (at least for the Internet behemoth) in the nine-plus years since its launch, “tens of millions” of shoppers around the globe have joined Amazon Prime, willingly forking over the $79 fee to receive “free” (i.e., pre-paid) 2-day shipping on all of their eligible purchases.

Creating Amazon Prime was a savvy decision in two ways. When shopping online, consumers rank free shipping as the biggest factor in their purchase decisions — more important than same-day delivery or even low prices. Through its Prime service, Amazon generates revenue upfront that allow it to offer free shipping even as it alleviates the primary reason why consumers abandon their shopping carts during checkouts: the sudden appearance of shipping costs that substantially increase their overall purchase price.

Since 2005, a large and growing number of consumers have been happy to shell out $79 to eliminate the sticker shock of shipping fees. The question that Amazon is now asking its customers is this: “Are you willing to pay an extra $20 for that same sense of certainty?” The answer will have profound, far-reaching consequences, not just for Amazon but for its e-commerce competitors as well.

Of course, Amazon didn’t become an online retail powerhouse by making poorly-considered decisions. As one of the pioneers in the subscription loyalty field, it recognizes the possible perils associated with raising the Prime price, and it’s sure to try to soften the impact — on members and its own bottom line alike — by augmenting the Prime benefits.

Members already enjoy free two-day shipping, unlimited streaming of tens of thousands of movies and TV shows through Prime Instant Video, and access to the Kindle Owners’ Lending Library. Among the likely enhancements are two possibilities in the near future and one longer-term goal that could present a serious threat to retailers of all sizes and kinds:

• A streaming music service. Amazon would be going head-to-head with Apple, Google, Pandora, and a host of other music providers in a highly competitive market, so its retention powers might be limited.

• A streaming TV-box service. Again, Amazon’s product would be facing off with Apple, Roku, and others, but this corner of the entertainment industry is far less settled, and it might help Amazon make inroads with the Millennial generation.

• Free overnight (or even same-day) shipping. This is a potential game-changer for the retail industry. Amazon already has 46 warehouses set up across the United States, all of them situated within 100 miles of high-density cities. If Prime members can receive their orders within 24 hours of placing them — at no additional cost — brick-and-mortar retailers will face more pressure than ever, coming from a company that’s already on pace already on pace to become the largest retailer in the country by 2020.

Fortunately, Amazon Prime’s rate hike offers an opening that its rivals can exploit before that happens. Smart retailers can mimic Amazon Prime’s business model and create their own pre-paid shipping programs (priced below $99 a year) and/or build out such programs with exclusive savings offers that would lock down their best customers at a price similar to the new Amazon Prime fee. Retailers with physical presences in multiple cities could also add same-day delivery services that would beat Amazon at its own game.

Retailers succeed by changing with the times. As Amazon reinvents itself, retailers must adapt to the evolving marketplace by offering customer more services and conveniences — efficiently and affordably, of course.

Tom Caporaso is CEO of Clarus Marketing, which creates and markets high-value subscription websites and loyalty programs designed to save consumers time and money. He can be reached at busdev@clarusmarketing.com.

© 2014