Amazon Prime: the cost beyond the membership fee

The headline membership fee underestimates Prime's actual cost to the consumer in two ways.

The first is the behavioral effect on purchase decisions. The mental-accounting research (Thaler, 1985, Marketing Sci.) provides the framework: once shipping is sunk into a membership fee, the perceived marginal cost of each individual purchase drops, and the threshold to add an item to the cart drops with it. The Prime member's purchase pattern reflects this — industry research consistently finds higher per-member purchase frequency for Prime than for non-Prime Amazon customers.

Thaler: "Mental accounts… are evaluated on a transaction-by-transaction basis. People react more strongly to the framing of an individual transaction than to its position in a larger context." — Thaler, R. H. (1985). "Mental Accounting and Consumer Choice." Marketing Science, 4(3), 199–214.

The second is data. The academic privacy literature (Acquisti, Taylor & Wagman, 2016, Journal of Economic Literature) frames the data collected through a membership relationship as a real cost — one consumers systematically under-value.

Acquisti et al.: "When firms know more about consumers, they can engage in more efficient price discrimination, targeted advertising, and product customization." — Acquisti, A., Taylor, C., & Wagman, L. (2016). Journal of Economic Literature, 54(2), 442–492.

For an honest evaluation, the membership fee is only part of the cost. The full cost includes the incremental purchases the membership induces (Thaler) and the long-run value of the behavioral data generated (Acquisti et al.). For households that primarily use Prime for shipping on a small number of necessary purchases, the membership likely passes. For households that have noticed their purchase frequency rising in step with the membership, the math may not work even at the headline price.

References

• Thaler, R. H. (1985). Marketing Sci., 4(3), 199–214.
• Acquisti, A., Taylor, C., & Wagman, L. (2016). J. Econ. Lit., 54(2), 442–492.

Related: Bundles · Data collection · Average household cost