The increase in production costs “doesn’t explain everything”says Julien Pillot, Doctor of Economics and teacher-researcher at Inseec, “It’s also part of a more global strategy” from Amazon, he says, while the American platform Amazon is increasing the price of its Prime subscription in five European countries, including France. In the USA, “The price increase has almost doubled within a few years” and “It didn’t cause massive unsubscribes”, he pointed out. For subscribers is the “Value for money remains largely favorable for services”According to him.
franceinfo: Do you find Amazon’s arguments convincing?
Julien Pilott: It’s compelling, but it doesn’t explain everything. Amazon as a company suffers from today’s rampant inflation, particularly in shipping costs. We could also talk beyond the fuel of the raw material, the paper pulp that goes into the manufacture of cardboard and paper, which are very intensive in the Amazon model. According to INSEE, it exploded by +40% in two years.
Indeed, Amazon has rising production costs and passes some of its production costs on to its subscribers, but beyond that it’s also part of a more global strategy. Amazon is very aggressively priced in order to quickly capture market share in each new country it enters. Then, little by little, when the conditions are met, when the offer becomes satisfactory, the company increases its prices, saying that in any case it remains painless enough to keep the subscribers under control despite everything and not enough subscribers to generate massive unsubscribe waves to make them dissatisfied. For example, in the United States, Amazon Prime started in 2005 at a price of $79 per year. Today we are at $139 subscription per year.
“In the US, price increases have almost doubled in a few years and that hasn’t led to massive cancellations, on the contrary.”Julien Pillot, Doctor of Economics and teacher-researcher at Inseec
How can the price differences by country be explained?
Amazon, as a technology company, uses pricing software to adjust prices based on subscribers’ willingness to pay. The willingness to pay of subscribers in France, for example, is not quite the same as in the USA or Great Britain, hence the price levels, but also the price increases, which can differ from country to country. Not to mention that the level of service isn’t exactly the same either. They have services, for example on Amazon Prime in the United States, that do not exist in France. There’s Amazon Now, the ability to ship in an hour or two. The Amazon key offers the possibility of sometimes being delivered to his garage or directly to his house or in his car. All these services do not exist in Europe and especially in France. Then the Amazon Prime Video catalog available is not exactly the same depending on the country you are in.
Is the platform taking the risk of massive unsubscribe?
40% increase for the annual subscription, meaning more than 40% of subscribers would have to unsubscribe, ultimately making it a costly process for Amazon. Of course it probably won’t. Amazon had to run anticipation models internally to ensure that this will not be the case.
“We roughly know the number of Amazon Prime subscribers, which surpasses 200 million subscribers today.”Julien Pillot, Doctor of Economics and teacher-researcher at Inseec
We are talking about a service that has reached a certain age and has seen several consecutive waves of price increases. The number of subscribers continues to grow, which means that in general and at a macro level we still have value for money that remains very favorable for the services. At least that’s how it is perceived by the majority of consumers.
Overall, does the future of these platforms lie in raising prices?
You still have to be able to do that. The more Amazon’s offer is perceived as competitive, the more likely Amazon is of course to be able to increase its prices up to a certain threshold. There is one more aspect to consider; it’s the running costs. The costs of operating and providing the service, which are associated with the level of service provided by Amazon. Amazon Prime Video did not exist in France a few years ago. Amazon made the decision to connect the Prime video service to Amazon Prime, at no additional cost to the subscriber, but on the other hand with production costs for Amazon. The more we have a diversified service and the more we have a qualitative offer at the level of this service, the more the production costs increase and at some point Amazon makes the decision to give a whole part of it to consumers. When you’re putting $500 million on the table to be able to produce a series based on The Lord of the Rings, which is going to be called The Rings of Power and is about to hit our screens, obviously at some point, you just have to see a return on investment can achieve, and that also means price increases.