You are PM at Amazon and you are asked to change the pricing for the Prime membership. How would you go about it?
Amazon- Rob Martin
Amazon’s Mission Statement:
“We strive to offer our customers the lowest possible prices, the best available selection, and the utmost convenience.”
The main objective of prime is to heavily boost sales by offering world-class customer service such as OTT, music, mom, pantry, smile, 1-day prime delivery, etc. (Customer’s Obsession – Amazon’s first leadership principle). We need to keep this objective in mind while pricing the service.
Clarification Questions:
Why does Amazon want to change its pricing strategy?
What is the main objective of changing the pricing strategy? (Gaining market share, Staying competitive against competitors, Generating profit, Growing as fast as possible, Starting a relationship, Maximizing profit)
Is there a flaw/strategic disadvantage with the current one?
Does the company think that the services it is offering are overvalued/undervalued?
The current strategy that amazon follows is a fair price for all. Currently, it is $119 per year per user.
Company Analysis & Strategy:
Currently, Amazon is facing heavy competition in the OTT space from Netflix and Disney/Hotstar. To boost up the revenue, it has to partner more with content-generating studios/banners and also have live sports on the application, the way Disney/Hotstar does. The strategic advantage amazon has is its wide user base in the e-commerce market. Netflix and Hotstar don’t have this advantage. Amazon can rely on its user base from the e-commerce market and generate a competitive advantage as explained below.
Objective Chosen: Boost Revenue and Increase user base in the United States.
I would suggest going with the usage pricing model for prime. Basic/Standard Subscription, Pro Subscription, Pro+ Subscription. This is just an example. In real-time, we have to analyze the trends of the user groups and plan according to put what services into which bucket so that revenue is maximized.
If the objective is to boost revenue/profits and also maintain the existing user base, Amazon has to analyze the trends of customer usage. [ I am assuming that 60-70% of the user base use almost all the benefits frequently, 15- 20% of the user base use services occasionally, 5%-10% use it rarely ]. My answer is based heavily on the usage patterns and the perceived value of the user for the service provided.
Pro + Subscription: (Prime delivery + Prime Video + other benefits)
If the customer is using almost every single service offered, the company has the lenience to charge more for that user. Increasing the price by 10% – 20% would not be a heavy burden on the customer’s side as there lot of additional value they are getting by paying a few more dollars. This subscription generates additional Revenue.
Pro Subscription: (As a PM, I won’t include prime video in this Pro subscription, but this will have prime delivery + all other benefits)
If the customer is an occasional user and only some of its services, he/she can go for this subscription. Probably we can keep the same /current price as-is for this category. This subscription helps in maintaining the current user base.
Basic/Standard Subscription:
We can offer only the prime delivery in this model and at a discounted price. The growing population who doesn’t have a lot of interest in a lot of OTT can go for this subscription at a discounted price of 10% – 20%. This category helps in maintaining the user base and also in acquiring new users just to start with.
Overall, amazon can boost its revenue with this pricing model.
Implementation & Risks:
As Amazon Prime is a huge feature in itself, before going live with this pricing model in the United States, we have to roll this pricing in a small country such as Singapore that has similar characteristics, income trends, and usage patterns. This way we can see the responses and correct our pricing model and mitigate the risk.
Having a user survey about the perceived value of prime is very beneficial.