Why Amazon's operating margins blot an otherwise perfect picture

Part 4
Why Amazon's operating margins blot an otherwise perfect picture (Part 4 of 4)

Why did Amazon increase the price of its Amazon Prime service?

Amazon’s operating expenses have gone up over the last year

A couple months back, Amazon (AMZN) hiked its Prime membership fees from $79 to $99 for the first time since its launch nine years ago. The main reasons for this price increase was higher shipping costs to deliver products to customers and exclusive subscriptions for some popular TV shows and movies. A quick look at the below chart of operating expenses will give us some idea of the fulfillment cost and technology and content costs as a percent. Both have gone up over the last year. Fulfillment costs are the costs associated with the transportation of goods to customers, while technology and content costs are the costs associated with subscriptions, including subscriptions for TV shows and movies.

Amazon Fulfillment ExpensesEnlarge Graph

Amazon hiked its Prime membership fees to offset increasing expenses

Amazon not only competes with other online retailers such as eBay (EBAY), but also with traditional retailers such as Best Buy (BBY), Wal-Mart Stores (WMT), and Radio Shack (RSH). During the conference call to announce Amazon’s Q1 earnings, management explained why it increased its Prime membership prices: “In terms of pricing, we’ve been very consistent. We want to offer great value to customers, and so I would work very hard to make sure that we can offer and afford to offer great prices for customers. And so, that’s something that we’ve been working on in the very hard over the years and that’s certainly one of the reason why you’ve seen the growth rates that we’ve experienced a long with getting close to customers, from the shipping perspective make sure we have great in stocks and other service attributes.”

Amazon’s management further explained, “In terms of price increases, we certainly have increased the price on Prime, but again that was after many years of not raising the price even though the cost of transportation costs certainly had gone up and the fact that we have certainly added a lot of selection going from little over 1 million items in the first year to over 20 million items. So it’s still an incredibly great value for customers and that’s why we did that.”

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