Should Amazon increase the price of Prime Membership? If so, estimate the revenue generated or lost.

Prime offers an annual subscription for unlimited free shipping for thousands of products sold by amazon and partners. The service comes in two flavors viz. retail and business. Annual price-$150

Prime also comes with free video subscription which is worth about $7-9/month

Other competitors of Prime are Walmart + and few others aligned with national level grocery store

Step 3: Choose objective

Increase revenue and profitability while remaining competitive and without reducing the user base

Step 4: Choose strategy

Mix of Cost basis, competititive and low starting price

Step 5: Compute a price

I am ignoring benefit of Amazon prime and restricting to only US gep

a) Average shipping price/$6 /item

b) Assuming prime has a subscription base of ~100 Mn with ordering behaviour as follows:

--30% make about 1 order/month =30 million orders

-50% make about 3 orders/month=150 million orders

-20% make about 5 orders/month = 100 million orders

cost of 280 million orders x $6/order= $1.68 bn

c) How is much prime earning/year from these customers=$149*100 Mn = $14.9 bn

Amazon is in fact making a profit of $13.22 bn/year from Prime subscriptions

c) With an yearly price of $149, customers will get a breakeven with $149/6= ~24 orders

Atleast 30% of their customers dont make full use of their prime membership and risk going to cheaper options like Walmart +. If Amazon reduces their price of their membership, they might risk reducing their profits.

Recommedation:

Create a low starting price model as follows

$100 for <13 shipping / year

$149 for unlimited shipping/year

With this Amazon might face a loss of $50 * 30 million- $1.5 bn but still avoid a risk of $4.4 Bn worth of business going to Walmart +.