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15 September 2022

Why Amazon is raising the price of Prime in a cost-of-living crisis

The retail giant has found it can hold out no longer as the cost of fuel, packaging and shipping rises.

By Oscar Williams

When Jeff Bezos launched Amazon‘s new two-day delivery service in February 2005, he wrote to customers outlining his plans. “We expect Amazon Prime to be expensive for in the short term,” he noted. “In the long term, we hope to earn even more of your business, which will make it good for us too.”

At first the initiative proved controversial within Amazon. Managers were concerned that high spenders would take advantage of the “all-you-can-eat” express shipping service and that the business would need to spend so much supporting it that it would go bust. It was true that Prime subscribers would buy more than regular customers – in the US, they now spend approximately four times as much as non-subscribers – but rather than entering administration, Amazon became the most valuable retail business in history.

Prime is so important to Amazon’s growth that it has sought to minimise price rises at all costs. The rise in the UK Prime subscription fee that comes into effect today (15 September) is the first since 2014. The price of monthly Prime memberships will rise by 12.5 per cent to £8.99, while an annual membership will rise by 20 per cent to £95. It isn’t the only price hike to hit the company’s British customers this year. Amazon also increased the fees it charges third-party sellers in May, and thousands of these businesses have put up their prices to absorb the extra cost.

“Amazon is one of the most consumer-centric companies in the world,” says Stefanos Nanopoulos, a former Amazon marketing manager. “For them to want to increase the price of their Prime membership means they’ve really reached their limits.”

Nick Carroll, an analyst at the market research firm Mintel, agrees. “The timing and the optics of it are not the best, but Amazon has shown it is not a business that does damage to its value perception lightly.”

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As the price of energy surges in Europe, Amazon is particularly exposed. The cost of fuel has a number of knock-on effects for a company of Amazon’s scale and presence. While the company is likely to benefit from government plans to curb energy price rises for consumers and businesses, this will only cover the cost of the electricity and gas it gets from the National Grid. It won’t cover the cost of running Britain’s second-largest delivery network. Nor is the cost of energy the only way it is affected by the inflation caused by the war in Ukraine. The increased price of grain has made cardboard and packaging more expensive.

These extra costs come at a time when Amazon’s razor-thin margins have already been squeezed. The company’s revenues rose rapidly at the start of the pandemic as consumers consigned to their homes turned to its delivery service. Yet its operating income – the amount of money it makes before tax – dropped by the largest percentage in four years last October because the pandemic pushed up the price of shipping. In the company’s latest set of results, for the second quarter of 2022, the figure fell by nearly 60 per cent to $3.3 billion.

“They’re taking baby steps with their price increase,” says Nanopoulos, who now works for Kantar, a brand consultancy. “It’s just the situation is so intense that even Amazon needs to increase prices.” At the time of writing, Amazon’s share price had fallen by 24.5 per cent this year.

Nevertheless, many analysts are optimistic about Prime’s continued growth. In the US there are more than 163 million Prime accounts, equivalent to around 60 per cent of the adult population. In the UK there are estimated to be 27 million Prime accounts, equivalent to one per household. Insider Intelligence forecasts that this figure will rise to 32 million by 2024.

The rate of growth may slow in the coming months, but as the cost-of-living crisis intensifies, Prime will only become more important to Amazon. “Price is becoming an ever increasing purchase driver for customers,” says Nanopoulos. “For retailers, inflation is very risky and it’s very easy for them to lose customers.” Many retailers across Europe are therefore investing in their loyalty programmes. Amazon is offering free Deliveroo deliveries to Prime customers, and they can watch its new series Lord of the Rings: The Rings of Power, the most expensive television show ever made. “Loyalty programmes,” says Nanopolous, “are going to be the key for retailers, to keep customers tied to them and not flock off to whoever has the cheapest price.”

[See also: The real cost of Liz Truss’s energy plan is dizzying]

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