Here’s Why You Shouldn’t Be Mad About Amazon Prime’s Price Hike

On average, an Amazon Prime member buys 50 items a year. It's not a bad deal, even for a $20 membership price hike.

Like most retailers, Amazon faces the challenge of keeping a decent profit margin. Sean Gallup/Getty Images

Starting May 11, the price for Amazon (AMZN)’s one-year Prime membership will increase from $99 to $119, the company announced on Thursday, attributing the 20 percent price hike to rising costs.

Last week, CEO Jeff Bezos revealed for the first time in his annual letter to shareholders that Amazon currently has 100 million Prime members globally and delivered about five billion packages through the program in 2017. That averages about 50 items for each Prime member who pays $99 a year, or $2 for each package.

At that rate, it’s unlikely Amazon is turning a profit.

Earlier this month, President Donald Trump bashed Amazon on Twitter with a string of posts alleging Amazon should be responsible for the loss of the U.S. Postal Service, which delivers about half of Amazon packages in the U.S.

Although Amazon didn’t disclose specific terms about its contract with the Postal Service, both shipping industry experts and Amazon stock analysts dismissed the president’s accusation by pointing out that package delivery is actually the only profitable line of business that keeps the Postal Service afloat.

According to the Postal Service’s latest quarterly report, it makes an average of $3.4 in revenue from every package delivery. The rate it offered Amazon might come below that number, but there doesn’t seem to be much wiggle room for Amazon to make a fortune out of shipping.

As more people join Prime and buy things with Amazon Prime on a more regular basis, Amazon’s shipping cost will further go up.

On top of that, Amazon has spent heavily expanding the Prime benefits from just unlimited two-day shipping to entertainment, including video streaming, music streaming and reading. Media analysts from MoffettNathanson estimate that, in 2017 alone, Amazon spent over $4.5 billion on non-sport content streaming.

But investing in streaming is a smart move to attract more people to join Prime, said Mario Natarelli, a managing partner at MBLM, a New York-based marketing agency.

“Amazon clearly knows its customers will be able to absorb this increase. Most people won’t mind paying a few dollars more a month to get Prime benefits,” Natarelli told Observer.

From a customer loyalty perspective, Amazon is the second most “intimate” brand to American consumers (second only to Apple), according to a 2018 study by MBLM. Amazon Prime ranks No. 25, higher than many e-commerce and streaming brands, such as Apple Music, HBO and ebay (EBAY).

Like many retailers, Amazon is struggling to make a real difference on profit margin on the e-commerce side. Instead, what’s really driving the bottom line right now is the Amazon Web Service (AWS), which accounts for just 11 percent of Amazon’s total revenues but produces 70 percent of profit, Thursday’s quarterly report shows.

For the first three months in 2018, Amazon posted $51 billion in revenue, a 43 percent jump from last year, and $1.6 billion in profit, more than double last year’s number.

The price increase of Prime membership will generate an additional $2 billion in annual sales for Amazon, about one percent of its total.

Here’s Why You Shouldn’t Be Mad About Amazon Prime’s Price Hike