The Bauminator

Prime Numbers

2/10/2014 10:17 AM

Amazon got some folks into a lather late last month when it revealed on its earnings call that the online retailer is considering jacking up the price of its Amazon Prime subscription by $20 to $40 as the online retail giant grapples with escalating shipping costs.

Amazon Prime currently sells for $79 per year, and includes free two-day shipping and access to an expanding streaming library. When boiled down to a monthly rate of about $6.58, the service, despite its connecting to product shipping, is typically viewed as a competitor to Netflix, which has been testing a $6.99 per month, single-stream, standard-definition only tier to new subscribers.

Some analysts worry that a price increase will cause Amazon to risk losing a portion of its valuable Prime customers, but are likewise hopeful that a rate hike will more than make up for any losses that come way of the resulting defections.

But how many Amazon Prime customers are there? Amazon has kept that precise figure under lock and key, disclosing only that it has “tens of millions” of Amazon Prime customers worldwide.

But Bernstein Research analyst  Carlos Kirjner recently presented the results of a survey of 1,500 online U.S. homes estimating that there are between 20 million to 25 million homes – about 20% of total U.S. households, with at least one Amazon Prime account, and roughly 70 million U.S. homes with an active Amazon account.

Kirjner’s report also shows the value of a Prime customer and why Amazon would be smart to do whatever it can to hold onto them. He estimates that the average pre-tax household income of an Amazon Prime customer is $93,000, $13,000 more than the average online household income of $80,000, and well above the overall average household income of $65,000.

“Not surprisingly, Prime households account for a disproportionately high fraction of expenditures in goods that we believe can be sold through e-commerce: they are 20% of total households, but 24% of the expenditures addressable by e-commerce,” Kirjner wrote. “Amazon's past disclosure that more than half of items shipped are sent to Prime users suggest that they…could spend 3-4 times what non-Prime Amazon homes spend.”

Amazon Prime will likely continue to be viewed as a key Netflix rival, but Kirjner’s analysis shows that video streaming remains a small component of the overall value that Prime represents to Amazon.

While Amazon does continue to plow more dollars into originals and new video streaming deals, Amazon CFO Tom Szkutak denied that that rising video licensing costs were among the drivers for the price hikes that Amazon is contemplating for its Prime service.

September