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

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What's the worst that could happen if "free shipping" gets a bit pricier?

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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.

But the real reason that Amazon announced that it is considering increasing its Prime pricing is that it needed to change the subject during its quarterly earnings call last Thursday, preferably to one with a dollar sign in front of it.

Wall Street was not at all happy with Amazon's latest earnings, which came in at $25.6 billion, a 20% increase from a year earlier, but still about $400 million less than analysts' expectations for the quarter.

Net income was $239 million for the quarter.

On the current quarter, the company said it might see an operating loss of as much as $200 million, with the upside estimate of $200 million in profit.

Investors have waited patiently for massive expansion to translate into respectable profits. They have watched as Amazon steamrollered the competition in one category after another, with its low prices and fast free shipping thrown in.

At least for that moment, they got impatient after that earnings call. The stock fell 10% in after-hours trading Thursday and, in a bad market, has dropped a couple of more percentage points since, to 346.14 at Monday's close of regular trading.

Raising the Prime price could bring in $400 million to $800 million, if the membership estimates are correct and if a modest number of dropouts are offset by a modest number of new enrollees.

At worst, Prime dropouts might re-think their shopping strategy on Amazon, making sure that their orders top the $35 threshold to score free shipping anyway, through the site's separate "Super Saver" offer.

Or, they might compare shipping prices on various sites and reach the conclusion that Amazon's shipping fees are relatively reasonable.

None of these sound like a losing scenario for Amazon.

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No positions in stocks mentioned.
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