What analysis would you go through to determine if/when Amazon should change the price of Amazon Prime?
When it comes to change of price it could be either decrease or increase.
Let’s see what Amazon offers in a prime subscription:
1. Free and 1 day delivery
2. Prime Music
3. Prime Video
What is the motive behind Amazon Prime?
1. Give delivery free so that customers feel they’re getting products cheaper
2. Make Amazon the go-to place to buy everything and since customers already have a subscription they prefer buying here not wanting their subscription to go waste
3. Give added benefits like Prime Video and Prime Music so that customers are more likely to get the subscription
How should we price Amazon Prime?
Since we our goal is to maximize the number of orders for a user by offering them free deliveries we should factor in the cost that we are going to bear. This should effectively be the price of Prime.
So the equation would be:
No of orders per customer in a year * Shipping cost for each product combined
If this results in a number greater than our current Prime subscription cost per year by a huge margin then we definitely need to increase the price. If the cost is marginally more than we can consider not making any change as we would be making more revenue from the customer anyway. But if the cost is significantly less than the Prime subscription, maybe because we improved our supply chain in such a way that our shipping costs have lowered, then we can consider lowering the price, and also market the same and push to create a Monopoly in the market.
But why did we ignore the expense of Prime Music and Prime Video?
I think we should not be factoring the cost to maintain Prime Music and Prime Video mainly because it’s just an added bonus on top of our free-delivery and also we would be generating much more transactions from a user once they’re a Prime member. In case we observe that Prime Video and Prime Music are loss making products for us we can always add ways to monetize it; say via Ads. (which Amazon has already started rolling out for Prime Video)