Piper Jaffray Reduces Churn Estimates For Potential Amazon Prime Price Hike

When Amazon (AMZN) reported fourth quarter earnings in late January, it said it was contemplating a price hike in Amazon Prime for the first time since inception. Piper Jaffray’s Gene Munster previously thought that a price increase on the shipping service could result in as much as 15% churn, he has now revised his estimates, after gather additional data. He now sees a 5% churn rate as more likely from any Prime price hike, with 15% at the high end of what could be realistically expected.


We believe that looking at price increases at other Internet companies. Most instructive may be Netflix’s (NFLX) pricing strategy change in 2011. In 2011, Netflix decided to split its DVD and streaming offerings into two separate subscriptions priced at $7.99 each from the prior offering that combined both services for ~$9.99 at the base level (1 DVD at a time). Users that intended to keep both subscriptions would be facing a 60% price increase. In the company’s first full report following the pricing strategy change, churn increased from an average of 4.2% prior to 6.3%, which we believe means that the incremental 2.1% in churn was the level of customer departure from the price change. Another example also in the digital video category is Redbox. The company increased prices from $1 to $1.20 (20% increase) and later noted that they believe the price increase had a 5-8% impact on volume. Overall, we believe that the two comparable price increases point to a mid single digit percent decrease in Prime customers if Amazon were to raise prices.


We did a survey of 500 current US Prime subscribers with the question: “If Amazon raised the price of Prime from $79 to $109, how likely would you be to renew your subscription?” Based on our results, 66% of Prime members suggested they would be unlikely or highly unlikely to renew their subscription. However, we believe that is an unrealistic outcome of any potential Prime price raise as psychologically no one wants to pay more for something. We believe that about a quarter of the Prime base is highly price sensitive (the highly unlikely group) and believe that may be a more realistic upper limit to the impact to the Prime base if prices were to increase.


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