Is Amazon a Prime abuser of trust with its delivery charge increases?

Earlier this week, Amazon announced that it’s doubling the minimum spend required for free delivery for its Prime customers in the UK. Prime subscribers, who pay Amazon £79 per year for membership, will now need to fork out an additional £3.99 for purchases made through the Prime Now service – plus an optional £2 tip – on orders less than £40 to benefit from a fixed two-hour delivery window. Previously customers had to spend just £20 to qualify for the same-day delivery service.

The move follows a similar roll-out in the USA, with Prime customers in New York now having to spend $35 – up from $20 – for a free fixed two-hour delivery service or pay an additional $4.99 ‘convenience fee’.

So, is Amazon abusing its powerful position of trust as a multi-sided platform business, having gained a critical mass of users and now cranking up the prices as customers are locked into the service? Well yes, and no.

Yes, Amazon is abusing its position of trust

Amazon has performed a classic bait-and-switch, made optically worse by the platform nature of the business that is creaming value from customers at multiple touch-points. Seducing customers to sign up for its annual Prime account to benefit from faster home delivery at a lower cost, then changing the rules of engagement once locked in is a shady business practice. And Amazon has considerable clout: in the USA, in September 2017 Amazon Prime had more than 90m subscribers – up from 63m in June the previous year. Estimates put Prime subscriber numbers in the UK at around 8m – a 33% household penetration rate.

This tactic of charging for something that was previously free is not recommended by leading thinkers in platform business theory, as best-case scenario the result is a well ticked-off customer who may discourage others from signing up, and worst-case the move has the potential to unwind the powerful network effects platform businesses rely on for success by increasing customer attrition rates and lowering average spend.

Prime is the passport to a whole range of valuable services offered by Amazon, where the company relies significantly on being able to monetise its user base across multiple offerings. Alienating subscribers with a ham-fisted price increase in one part of the offering could impact renewal and sign-up rates in the future, giving the company less customers with which to monetise its other offerings.

Amazon is therefore taking a gamble that its strong competitive position will let it ride out the delivery charge increase brouhaha as its customers find they cannot live without the range of services it offers.

No, Amazon is simply undertaking a competitive realignment

Put into competitive context, the new Prime delivery charges and range of services Prime subscribers have on offer are arguably very good value for money. In addition to the speedy delivery service, Prime subscribers can, among other benefits, access streaming video and music services at no additional cost, as well as receiving significant discounts on purchases made through Amazon brands. Looking at a comparable basket of services in the UK from independent alternatives, Prime stacks up well in terms of value for money.

This back-of-a-fag-packet calculation shows that Amazon Prime is still cheaper as a bundled service – by at least one-third – than a comparative basket of services bought from independent retailers.

Whether this cold logic satisfies disgruntled Prime subscribers currently surrounding Amazon with torches and pitchforks is debatable, but perhaps Amazon is guilty of no more than using a classic penetration pricing strategy to boost membership before migrating to a more sustainable pricing model. If so, Amazon is therefore also guilty of not letting its customer base in on the strategy, and that’s a real shame for a company asking its customers for so much trust in being the sole provider of so many services.

Where do you stand on the Amazon Prime delivery charge increases? Is this type of behaviour we as customers need to get used to for the convenience of buying from platform businesses? Please do leave a comment to join the debate!

Table sources:

Amazon; Tesco; Netflix; Apple; Spotify