Is Amazon.com cashing on consumer behavior?

I am very much tempted to answer – YES. The genesis of this post is the recent report by NPR’s Stacey Vanek Smith; the case under consideration is Amazon.com potentially raising the cost of its Prime membership from $79 to $99 per year or more.

Prime membership gives consumers free shipping on their orders and free access to numerous books, movies, and TV shows. The volume of Prime subscribers is estimated to be well over 10 million and growing rapidly. Could it be that Amazon.com has decided to curtail the growth of membership? This could be sensible if Amazon has reached capacity limitation for shipping or content streaming. Neither seems likely, though. So what is the logic behind the (possible) decision?

The report offers this explanation:

But the rationale for raising prices, may not be fast cash, speculates Michael Levin, co-founder of Consumer Intelligence Research Partners in Chicago.

“At Amazon, nothing is ever what it seems,” he laughs. “If they charge more, I think customers are probably going to spend more. So quite ironically, by raising the price of this membership, they may end up getting people to shop there even more.”

A more expensive Prime membership equals a customer who is all the more motivated to get his or her free-shipping’s worth.

Having done some research on the topic of consumer behavior, my explanation for this phenomenon is the so called Sunk Cost effect. This is a well-known phenomenon in Behavioral Economics. In simple terms, the effect occurs when consumers continue to use products that have become obsolete. Moreover, the usage increases if consumers spent more money to purchase these products. As such, this behavior is irrational in the classical economic rationality sense: a decision to use a product should depend only on the current or future cost and benefit, but not on a past one.

So by raising prices of the Prime membership, Amazon.com could be just targeting our irrational tendency to recover sunk costs. Even if there is an identical product couple of dollars cheaper, Prime members would still buy from Amazon, driven by the (sunk) cost of membership.

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5 thoughts on “Is Amazon.com cashing on consumer behavior?

  1. Forbes published a similar article yesterday morning (http://www.forbes.com/sites/markrogowsky/2014/02/02/prime-factors-should-amazon-really-mess-with-the-best-loyalty-program-in-retail/) that describes the customer utility of having a prime membership, and the barriers to getting to that point where “it [Amazon] becomes not just the default e-commerce option, but the default shopping option.”

    I think this point illustrates an interesting concept – while the current Amazon Prime members will probably use the above “sunk cost” theory as justification for throwing in another $20 – those are not the members whom Amazon should be concerned. The real question becomes, how do you manipulate the routine Amazon shoppers to the addicted?

    Another point to note is how this price increase reflects the company’s image. After Amazon posted disappointing 4Q earnings (http://www.forbes.com/sites/maggiemcgrath/2014/01/30/amazon-falling-fast-after-fourth-quarter-earnings-miss/), this price increase seems like a desperate attempt to gain fast cash, when in reality, all it does is irritate loyal customers. Consider a similar circumstance with Netflix, when in 2011/2012 “it [Netflix] increased prices a few years back and while the direct losses were small on the streaming side (about 800,000), the effect was to hurt the perception of the company overall.” As we all know, Netflix was very close to going under until they reinvented their line of business, and it will be interesting to see over the next coming months how customers react to this price increase and how Amazon responds to the resulting fallout.

  2. Also by doing so, Amazon is actually encourage customers to abuse their prime membership rights (like exchange and return, or take advantage of subscription discount without enough purchase), especially when Amazon allows customers a long period of membership trial and cancel without penalty. Those right abuse drives up the cost of Amazon and then hurts those real loyal customers’ benefit, and then drives them away or just turn them into bad-behavior customers, too. Amazon can get cash but not net income in this unsustainable way. But one other hand, even though Amazon raises price, compared to its other online retailer, it stills remains its competitive advantage, therefore, even though the price raise irritates its customers, the results of market loosing might be slight. And the price raising will also relieve the pressure of pricing competition for the whole industry.

  3. I think this is very interesting and not something that the average Amazon consumer thinks about. These unconscious retail behaviors are very important to understand and will allow for companies to maximize their revenue. This is a very interesting field to go into that combines psychology and business management and is probably an emerging field within retail management.

  4. I definitely agree with the assumption that, by increasing prices, people will be more inclined to “get their money’s worth”. By increasing the cost of membership, I agree that customers will be much more loyal to Amazon. I do not, however, think that Amazon wants to curtail memberships due to capacity constraints. Amazon serves as a “middle man” in the shipments industry and houses barely any inventory. In my opinion, it would welcome more loyal subscribers to the Amazon “cult”.

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