Is Amazon Prime Suffering From Its Own Success?

George Anderson , Contributor

Amazon.com has a problem with its hugely successful Prime membership program — namely that the program is hugely successful. The e-tailing giant recently raised the price of the annual subscription program, which offers free two-day delivery service to members along with other perks, from $79 to $99. But Prime is an expensive program to run and now Amazon is offering customers credits to wait longer for deliveries.

According to CNET, Amazon is now offering a $1 credit toward an Amazon Instant Video for Prime members willing to wait five to seven days to receive their shipment instead of the typical two.

Last week, Amazon reported a loss of $126 million for its second quarter, more than offsetting its profit of $108 million during its first quarter.

The new Amazon Prime incentive was largely unpopular with RetailWire’s BrainTrust of retailing experts, who took on the topic in an online discussion earlier this week. Some saw the $1 credit as an indicator that Prime’s promised perks are, in the long run, too good to be true.

“Amazon has a business model problem, I think, not just a Prime problem,” said Paula Rosenblum, managing partner at RSR Research. “Because it is virtually impossible to calculate what’s going to be in any given order … it is always going to be hard to get shipment synergies. The company just ships too much air, or occasionally over-packs boxes (cat food buyers beware!). As much as it saddens me as a customer, I think the company has to do something to mitigate its shipping costs.”

Photo: Amazon.com

Photo: Amazon.com

Retail consultant Cathy Hotka agreed that Prime’s price increases may signify that Amazon, by virtue of its sheer size and scope, is hitting a logistical wall.

“While its past successes are legendary … it’s hard to imagine that Amazon can continue to scale at the rate it has been,” said Ms. Hotka.

Ken Lonyai, co-founder of Screenplay InterActive, saw the changes in Prime’s pricing structure as attempts to paper over emerging flaws. “This is clearly a chink in the armor,” said Mr. Lonyai. “Free shipping going from $25 to $35, a higher Prime membership rate, add-ons, slower Prime delivery, etc. seem to indicate that the business model is not as infallible as many believe. For me it all harks back to the dot-com bubble days, when huge losses for customer acquisition were acceptable, until, well — you know.”

Some, though, are not entirely convinced that Prime’s shipping deals are unsustainable loss-leaders, even though price adjustments may be needed to offset them.“While Prime may be contributing to the company’s challenges temporarily,” said director at MB&G Consulting Bill Davis, “it’s still a tremendous advantage in terms of attracting and retaining customers, so I still think it is of great benefit to the company.”

However, Mr. Davis noted that each area of business in which Amazon operates has its risks.

“Amazon is such a diversified company that what gets lost in this debate is the recent launch of their Fire Phone and the costs associated with this,” said Mr. Davis, “as well as increasing competition in their cloud services business. … For me, the bigger question is, can Amazon keep hitting on all cylinders with its focus spread across so many different areas?”

Consultant Dan Raftery, on the other hand, was optimistic that Amazon would find its way to a profitable model.“The new 800-pound gorilla is smashing traditions left and right as it forges its own path through the retail forest,” said Mr. Raftery. “So what if it makes a few mistakes?”