Amazon's Prime Move May Be Just Fine With Customers and Investors

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When Amazon (NASDAQ:AMZN) introduced its Amazon Prime two-day free shipping program for $79 per year back in 2005, many investors and analysts thought the idea was plain bonkers.

A year of unlimited free shipping for $79? With no limits on product weight or ordering frequency, and no minimum price?

Way to sink that ship!

Nine years later, Amazon has built its vast retail empire largely around the Amazon Prime program and its power to convert occasional shoppers into hardcore Amazon addicts.

Hard numbers are tough to come by since the company never releases specifics when it can avoid it. But best estimates are that close to 20 million consumers have Prime memberships, and they spend about twice as much in a year as non-Prime customers.

By late 2010, Bloomberg Businessweek would describe Amazon Prime as “the most ingenious and effective customer loyalty program in all of e-commerce, if not retail in general.” It estimated that the program broke even three months after it was introduced.

Now, Amazon’s admission that it is considering increasing the membership fee by $20 or $40 a year, to $99 or $119, has been greeted with trepidation if not outright panic by investors.

Customers are alarmed, too. The results of a poll by the Wall Street Journal suggest that 47% of Prime members might quit if the price is increased.

Keep in mind that this is a self-selecting poll of Journal readers, not a random sampling of the general public. Remember also that saying you might do something isn’t the same as doing it.

Finally, consider the alternatives, or lack of them, to a free-shipping offer that covers approximately 19 million products, from toothpaste to power drills, with free streaming videos and some cloud storage thrown in.

So, that price increase is the equivalent of maybe two small deliveries in a year, or four if the increase is doubled to $40. Still going to quit Prime?

Amazon has in fact added some business-like sanity to the program over the years. Customers need to bundle small purchases to get free shipping. Some heavyweight Prime items clearly have hidden shipping costs built in. The Prime selection of “free” video is pretty limited in quality, if not in quantity.

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