Amazon’s recent statement that it’s contemplating raising the price of its free-two-day-shipping membership program by $20 to $40 from its current $79 annual rate has ignited a firestorm of sorts and led to a UBS stock downgrade on Wednesday that cited concern that a significant percentage of existing Prime members won’t renew at a higher price level.
Instead of debating the magnitude of the Prime price hike, it may be time for Amazon to unbundle the 9-year-old program, argues Rafi Mohammed, a pricing-strategy consultant and author of “The 1% Windfall: How Successful Companies Use Price to Profit and Grow,” in an article in Harvard Business Review. He suggests Amazon look at cellphone companies that offer variable pricing based on consumer usage levels.
“The key lesson in pricing for any company is to understand that customers are different,” he said in an interview with MarketWatch, adding that Prime membership is a key marketing tool for Amazon, with Prime-member purchases representing about 36% of Amazon’s $74 billion in annual revenue. “There’s so much more to pricing instead of a simple two-lever, up-and-down strategy. There’s a lot of ways you can slice that pricing. Let people self-select the shipping and pricing option. The notion of offering customer choices is something that becomes standard in all industries. Most companies should offer good, better and best prices.”
Mohammed offered the example of Red Lobster, whose bottom line was seriously damaged when it offered an Endless Crab promotion in 2003, as a cautionary tale for companies offering any unlimited plan.