Amazon Prime Fee Hike: Calming Example Of Costco

Feb.10.14 | About:, Inc. (AMZN)

By Jeff Bailey

The slide in Amazon (NASDAQ:AMZN) stock was set off by a disappointing report on fourth-quarter sales and earnings per share, but also spooking investors was a suggestion by the online retailer's executives that they will be raising the fee for Amazon Prime members from its current $79 to something between $99 and $119.

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Won't that scare off Prime members, and thus lead to even slower sales growth, some wondered? Perhaps. But Mark Miller, a retail analyst at William Blair in Chicago, looked at Costco's (NASDAQ:COST) experience in jacking up its membership fee in recent years, and found that the increases resulted in very little churn. Costco enjoys membership renewal rates above 80% and fee increases in 2000, 2006 and 2011 - 13%, 12%, 10%, respectively - didn't change that, Miller reported. Miller said in a report this week:

"Costco has experienced no discernible impact on its membership renewal rates following fee increases."

Costco is even more reliant on its membership structure than Amazon is on Prime; you can't shop at Costco without being a member. And Costco has successfully shifted its biggest-spending shoppers to Executive membership, now $110 a year, and they account for roughly half of total sales; Executive members get a 2% rebate on purchases. Normal membership is $55; no rebate.

Amazon Prime members get free two-day shipping on most items, and that amounts to a large discount. And they have access to streaming media free as well.

The analyst Miller believes the announcement of a likely Amazon Prime fee hike helped drive down the shares last week, but sees it as a buying opportunity:

"Out belief if that there will be minimal churn in the Prime membership base, and more households will align with Amazon to do more of their shopping with Amazon."

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That's the bull view. Miller rates Amazon shares outperform, or a buy. Prime customers becoming even more loyal, in his view, would help drive sales up. And that's what has propelled the shares thus far.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times.

Disclosure: None