Amazon Prime Increase: The Impact for FBA Sellers

Amazon.com recently announced a price increase for its beloved Amazon Prime service, which offers free two-day shipping on more than 20 million items as well as access to its on-demand service Amazon Instant Video. The price of an annual subscription for Prime increased from $79 to $99, an increase of slightly over 20 percent. However, this marks the first increase in nine years. The benefits of Prime are considerable for shoppers who purchase items frequently, and those who are going to buy large/bulky items that typically carry a substantial shipping charge.

Much discussion has centered on how consumers will react to the price increase. There are sites offering "Is it worth it?" calculators to help shoppers input their buying habits and compare the likely shipping savings to the increased annual cost. While the reception by customers is of course important, the Prime increase also directly impacts companies in the e-commerce world that use Fulfillment by Amazon (FBA) for all or a significant portion of their sales.

Sellers that use FBA often enjoy the benefits of Amazon Prime because the customer enjoys the convenience of two-day shipping, and the seller gains good will from these satisfied customers. There's debate whether higher fees will mean a reduction in Prime usage or if dedicated customers will simply use it more often to save more on shipping, effectively offseting the $20 increase. Sellers outside of FBA won't be immediately affected because their items go through the Marketplace and aren't eligible for Prime shipping.

A poll conducted in February 2014 (before the details of the price hike were announced) by the Consumer Intelligence Research Partners (CIRP) indicated 94 percent of respondents would likely renew at the current 79$ price, but under half said they would definitely or probably renew at a $99 price point. These advance polls can provide insights but might be misleading because some individuals claim they won't renew at a $20 higher price point, but will agree to it when the time comes. For the average consumer $20 isn't a large expenditure, especially when it provides in this case a tangible reward of convenience and elimination of shipping charges.

Many shoppers use Prime exclusively, ignoring noneligible items and maximizing the cost/benefit. These types of consumers can do the math and quickly see that Prime membership is still worth it, even if they face modest annual cost increases.

This increase will affect some FBA sellers that may see a drop-off in sales volume based on the price hike. Retailers will need to judge how many sales they ship via FBA that are covered by Prime and be prepared to adjust their inventory if lower sales volume does result. The broader source of worry for the FBA seller community is that Amazon operates on very thin margins, and its generous shipping discounts eat into those margins. Amazon will need to make up that money somewhere, and sellers are a potential target for higher FBA fulfillment and handling fees.

Mark Faggiano is the founder and CEO of TaxJar, a service built to make post-transaction sales tax compliance easier for multichannel e-commerce sellers. Mark can be reached at mark@taxjar.com and on Twitter @brand5 and @TaxJar.