Wired Business reports that analysts at Morningstar and Consumer Intelligence Research Partners (CIRP) believe that Amazon could dramatically increase profits by selling its Prime membership for much less than the current price of $79. The Amazon Prime membership, which provides a full year of free two-day shipping, is associated with much larger consumer spending. According to Morningstar and CIRP, Prime members spend $800 more per year than non-Prime customers. For this reason, CIRP advocates giving the membership away for free so as to induce greater spending among the newly enrolled Prime members.
The problem with the analysis underlying this recommendation is that CIRP assumes that Prime and non-Prime consumers are identical in all relevant aspects except for access to free-shipping. What is more likely, however, is that those members who tend to spend more on Amazon are also more likely to recognize the financial gains of reducing shipping costs to $79 per year. This selection effect means that many Prime members would probably spend more than non-Prime members irrespective of the pre-paid shipping. I am not disputing that customers will spend more once shipping costs are eliminated, but the key question is whether they will spend enough to offset the lost revenues from Prime memberships. Given Amazon’s large customer base, and detailed data on most of its customers purchasing habits, this question could be answered by comparing before and after purchasing levels for consumers who were offered the Prime membership at little to no cost (e.g. college student subscriptions).