Amazon Prime price hike in Spain

Why price elasticity doesn’t apply to Amazon

Enrique Dans
Sep 1, 2018 · 3 min read

On Friday, Amazon told its Spanish users it was increasing the price of Amazon Prime, its preferential subscription program that provides access to a flat rate of logistics and several of its services, from €19.95 to €36.

That’s a hefty increase, and that follows those in other countries: in the United States, the price of Amazon Prime went from $99 to $119 back in May, although it includes some more services and considerably bigger music and book catalog. In the rest of Europe, the range of services included in Amazon Prime are similar to Spain, but more expensive, ranging from €88 euros (79 pounds) in the United Kingdom, €69 in Germany or €49 euros in France. In Italy, the price and catalog scheme is identical to that of Spain, the increase has been identical, and was applied last March.

What’s the likely impact of such a big increase on such a strategic product? Amazon customers who subscribe to Prime spend almost twice as much on the platform due to the perception of increased convenience and making their money back from the subscription. The service is growing rapidly in virtually all its markets, with a renewal rate of practically 100%. In the United States, 51% of households subscribe to Prime, a figure that rises to 70% in households with incomes over $150,000 dollars. At the international level, subscriptions between 2016 and 2018 increased by 56%. In his 2016 letter to shareholders, Jeff Bezos said that “the company’s aim was to make Prime such good value that not signing up would be irresponsible”.

Which brings us to price elasticity: a measure used in economics to show the responsiveness of the quantity demanded of a good or service to a change in its price when nothing but the price changes. Determining this are variables such as the availability of substitute products, the percentage that represents the increase over the consumer’s income, the level of need, duration, the breadth of the definition of the good or service, brand loyalty and who pays. Studying the effects of each of these determinants is revealing: Amazon Prime is not, as such, a product of first necessity, but it lacks practically comparable substitute products, mainly due to the breadth of its definition. The perception of the product ranges from the convenience of unprecedented logistics to the possibility of access to services such as its back catalog of books or music, along with a growing range of possibilities. This is a brand undoubtedly capable of generating loyalty, even if it does so in a way that breaks with tradition, and making it possible for more and more users to overcome charges that they are doing something bad when they buy through Amazon.

What company in its right mind would double the price of product so strategic to its growth? It has to be said that after price increases in other markets, Amazon Prime is pretty inelastic, even in the face of dramatic increases such as those that have taken place in Spain or Italy: existing customers accept the price rise because they like the advantages of subscription, while new subscribers don’t seem to be unduly put off. In addition, the arrival of new products and services such as Amazon Echo or Amazon Fire TV further encourages use, raising its profile and increasing consumption. Every household that talks to Alexa or uses the Amazon Fire stick on its television becomes a more bigger user of the rest of the company’s products.

Recent analysts’ forecasts point to a strong increase in the company’s share price, which, if all goes to plan, could make Amazon the next member of the trillion dollar club. In short, a lesson in price elasticity: when you have the scale to offer products such as Amazon Prime, the concept takes on a very different meaning than for other companies.


(En español, aquí)

Enrique Dans

On the effects of technology innovation on people, companies and society (writing in Spanish at enriquedans.com since 2003)

Enrique Dans

Written by

Professor of Innovation at IE Business School and blogger at enriquedans.com

Enrique Dans

On the effects of technology innovation on people, companies and society (writing in Spanish at enriquedans.com since 2003)

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