This week Amazon sent out an email to a few million of their closest friends to share some tough news: the price for Prime memberships are going up. And no one likes it when prices go up.
But in typical Amazon form, this price increase was done extremely well. I’ve seen a number of companies change pricing and get a hugely negative reaction from the market (Netflix, anyone?). In this case, I’d be very surprised if Amazon’s membership saw a significant decline, and downright shocked if revenue from Prime memberships decreased.
Before we dive into what makes the execution of this pricing change so fantastic, let’s look at some of the numbers to get a sense for how big it is.
Let’s start with the belief that Amazon has about 20 million Prime members. The current price for a Prime membership is $79 per year, meaning Amazon earns around $1.5 billion each year from the subscription alone. Not bad. When that price goes up to $99 per year, it will become nearly $2 billion in recurring revenue.
Of course, to get that $2 billion revenue number, you would need to assume that no customers churn as a result of the price increase. Customer churn is the number one fear for companies who raise price. But with a $20 per member increase, Amazon could actually churn just over 20% of their membership base and still break-even on subscription revenue (16M members, a 20% decrease, at $99 per year = $1.5B). That’s 4M people saying no to Amazon Prime before they start to lose revenue. Now there are plenty of reasons for Amazon to not want that outcome, but it shows how important this change is, and how badly they’d have to screw it up (20% churn) in order to lose here.
With great pricing execution, the churn number won’t get anywhere close to 20%. Why not? Let’s start by taking a look at the email announcement.
Why is this so great?
First, Amazon is communicating the news early – a full 247 days before any action is needed on my side (renew or churn). Next they offer a brief explanation of cost increases. Finally, Amazon gives me some reasons why their Prime service is so great. It’s a short reminder of all of the great value that I am getting from my membership.
I always encourage proactive communication on price increases, but for some reason companies like to hide from their customers. Account Managers will avoid calling into accounts for a few months when they have bad news, and the result is bad customer service on top of higher prices. Not helpful.
The other great thing about giving me a 247 day heads up is that it disconnects the bad news (prices are going up) from the customer’s decision to renew. It offers me time to focus on the value of the membership and come to that re-purchase decision in November with positive feelings about Amazon (“I loved my recent purchase; Prime is worth every penny!”) instead of negative feelings (“Damn this big corporation for raising their prices on me! I’ll show them and cancel!”). Build karma and mitigate irrational customer churn at the same time. When it’s time to re-purchase, most customers will have forgotten the price increase ever happened.
Finally, Amazon didn’t do one thing that I absolutely love. They didn’t share the old price, only the new one. Why does this matter? If you share both prices, you encourage the buyer to think about the delta. For some, a $20 increase might seem like a lot. Others will note that fuel costs – the purported reason for the increase – haven’t gone up by 20% in the last year, so neither should my membership. Either way, the buyer is thinking about the pricing change.
By sharing only the new price, the buyer is left to think only about the value received. That’s why Amazon quickly lists all of the great features of Prime memberships in the email and reminds you of how much you’re getting for just $99 per year.
In the end, maybe it’s because I’m a pricing nerd, but I’ll be happy to renew come November.
Then again, maybe it’s because Amazon handled the price increase extremely well and offers a great customer experience. Now there’s something we can all learn from.