I’ve subscribed to the popular Amazon Prime service for three years and have frequently used their free shipping without any complaints. It’s prompted me to buy things beyond books and media that I likely would have shopped elsewhere for – cameras, household items, clothing.

A few days ago they announced a 25 percent price jump – from $79 per year to $99. Reaction to this move has been polarized. Some people have threatened to cancel their service while others have said it still easily pays for itself. Others have even commended Amazon for their capitalist savvy.

I’ll take the somewhat contrarian view that this change is actually good for consumers, including myself. Why? Consumers typically think that low prices are in their best interest. But in this case, it’s all about Amazon funding more investment in their Prime Service, which today benefits tens of millions of subscribers, but only represents approximately three percent of their top line revenue.

Prime perks

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Amazon acknowledged in their January earnings report that they struggled with capacity and had to limit new signups during peak periods. Their Prime Instant Video service has a smaller catalog of titles to choose from than Netflix. But their service will improve over time, by offering additional benefits, such as exclusive access to their own developed content, 4k definition downloads and more Kindle book downloads.

At first glance, Amazon’s price increase seems like a repeat of Netflix’s faux pas – remember, they raised their prices in 2011 and faced a ton of backlash while seeing a significant drop in number of subscribers and in short term stock price. But consumer concern was due mostly to them splitting out their on-demand service from home DVD delivery, versus anger over a price increase.

And Netflix is reportedly close to raising their prices again, soon.

Being savvy in the Subscription Economy

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Amazon’s move also validates the subscription business model. Here at Zuora, we talk with a lot of subscription businesses. Pricing evolution is an inherent part of doing business in the Subscription Economy. Companies with recurring revenue-based business models are known to build deeper relationships with their customers and are more knowledgeable about the value these services provide.

Because of their subscription-based business model, Amazon enables them to know exactly how many orders I placed last year (27) and how many on-demand shows I watched (zero).

They can precisely calculate the value I received in free shipping – last year I’ll estimate I saved $108 ($4 per order avg). They looked at their subscriber base in aggregate and figured out the right price point that balances revenue growth with loss in subscribers.

Aligning price to value is a process of continual refinement. Amazon has earned the right to increase their price. And in the long term this is a good thing for all of us, like it or not.

About the Author

Joe Andrews is Senior Director of Marketing at Zuora, where he leads solution and content marketing. He has 20 years of experience in technology marketing, sales and IT business operations. Prior to Zuora he led product marketing for VMware’s cloud services and previously worked at Intuit in several product and channel marketing roles as well as IT business consulting. Follow Joe on Twitter here.