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Amazon's bet on raising prices for 'all you can eat' Prime membership pays off in sales – but not in profits

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Amazon's bet on raising prices for 'all you can eat' Prime membership pays off in sales – but not i
Amazon's bet on raising prices for 'all you can eat' Prime membership pays off in sales – but not i
Amazon’s bet that customers would continue to sign up to its ‘all you can eat’ Prime membership programme even when its price went up has paid off, its chief executive Jeff Bezos said this week.

In the US, the cost of Prime membership rose from $79 to $99. But in the UK, the company renamed its Lovefilm subsidiary Amazon Prime Instant Video, rolled use of it in with the Prime membership that previously covered downloads and Kindle lending library membership, and raised the annual price from £49 to £79 last spring.

But today Amazon confounded those who questioned the appraoch by reporting a 20% rise in net sales, to $88.99bn (£58.99bn)in 2014, and 53% growth in Prime membership. That, however, did not equate to profitability. The retailer turned in a net loss of $241m (£159.85m) in the year to December 31 2014, 187% down on net income of $274m (£181.74m) in 2013.

That’s likely to be, to some extent, a result of investment: the Prime programme has cost the company “billions” in shipping fees, Bezos said as he reported fourth quarter and full-year figures.

“When we raised the price of Prime membership last year, we were confident that customers would continue to find it the best bargain in the history of shopping,” he said. “The data is in and customers agree – on a base of tens of millions, worldwide paid membership grew 53% last year – 50% in the US and even a bit faster outside the US. Prime is a one-of-a-kind, all-you-can-eat, physical-digital hybrid – in 2014 alone we paid billions of dollars for Prime shipping and invested $1.3bn (£0.86bn) in Prime Instant Video. We’ll continue to work hard for our Prime members.”

In the fourth quarter of the year, the retailer said, net sales increased by 15% to $29.33bn (£19.44bn) while net income of $214m (£141.87m)was 10% down from $239m (£158.44m) in the same period in the preceding year.

Amazon is known for its innovations and during the last quarter of the year they included the launch of its Prime Now one and two-hour delivery service accessed via a mobile app, launched its eighth generation fulfilment centre, complete with robotics and vision systems (more than 15,000 robots were at work in 10 US fulfilment centres in the peak pre-Christmas shopping season), and presided over 65% growth in the number of sellers outsourcing their picking, packing and shipping to Amazon through Fulfillment by Amazon. In 2014 Amazon.in became India’s largest online store, in its second year of operation. In the UK, the company saw Sunday deliveries grow by more than four times during 2014, and is to open a fashion photography studio in London for its European fashion business.

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