Amazon Raises Price for Prime Service

UPDATED: This is the first fee increase since the service was introduced nine years ago.

The price for Amazon's Prime service is going up.

The company announced on its website this morning that it will soon charge $99 per year for the service, which offers free two-day shipping and access to its streaming video service. That's a 25 percent increase from the existing $79 fee. Student membership, which is only available to those enrolled in a college or university with a valid .edu email address, will increase $10 to $49 per year.

The price hike will go into effect on March 17. New members can sign up for the lower $79 membership until the price hike goes into effect.

This is the first time that Amazon has raised the price of Prime, but the move is not a surprise. Amazon said on its fourth-quarter earnings call in January that it was considering increasing the price of Prime by $20-$40 in the U.S., due to the increased cost of fuel and transportation and increased usage among Prime members.

The company also noted that benefits to Prime members have grown since it first launched the service nine years ago. It has increased the items available for free two-day shipping from 1 million to more than 20 million, added the ability to borrow more than 500,000 books from the Kindle owners' lending library, and introduced 40,000 streaming titles through Prime Instant Video.

The Prime Fresh membership fee will remain unchanged at $299.

Analysts are bullish on the move and do not expect the price hike to slow down Prime membership growth.

"Most consumers will say they aren't willing to pay more for a given service, but when confronted with the fee hike, decide the nominal increase is worth it for the service," wrote B. Riley's Scott Tilghman in a research note this morning. "We suspect this will be the case for Amazon, with renewal rates probably over 80 percent compared to the 60 percent or so suggested by the surveys."

Tilghman added that the $99 price point opens the door for a tiered pricing system that would allow people to subscribe to Amazon Instant Video or Kindle's lending library separately. That move would "cater to customers that are less heavy users that the traditional Prime users. Ultimately, this would help monetize digital content and manage/reduce shipping costs.

Amazon does not disclose the number of Prime members, but research from Cowen and Co. estimates that there are about 23 million members in the United States, representing a 37 percent increase year-over-year in January. The research also indicates that 95 percent of Prime members visit Amazon monthly and 85 percent make a purchase.

Cowen and Co.'s John Blackledge also noted that the $20 fee increase would bring $460 million in incremental revenue. The upside would boost margins from 4.4 percent to 4.8 percent.

Amazon shares are trading up more than 1 percent to $375 during midday trading. At one point, the stock reached more than $380 on the news.