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Is an Amazon Prime Membership Worth an Extra $100 a Year?

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Amazon.com's (NASDAQ: AMZN) Prime membership can be one of the best deals anywhere online. It can also be a complete waste of money, depending on how you use it. In this article, we'll shine a light on the costs and benefits of one of Amazon's best-known features to help you determine whether an Amazon Prime membership is worth its $100 annual subscription fee.

Amazon Prime: Costs and benefits

Let's start with the simple side of the equation. Users can pay for Prime in two formats, a single annual $99 charge, or in 12 $10.99 monthly increments. Interested consumers can also try a free 30-day trial of Amazon Prime prior to subscribing. In terms of how Prime's pricing structure has changed, Amazon increased the service's cost from $79 to its current $99 in 2014, and it's certainly conceivable that Amazon could continue to gradually raise the service's cost as it adds features over time.

Here's where things get fun. In terms of Amazon Prime's benefits, the company officially lists 21 total features as part of the service. Some are as uninspiring as selected free book rentals for Kindle owners, though the meat of Amazon Prime's benefits primarily include:

  • Free two-day shipping and free same-day delivery to eligible addresses in the contiguous U.S. (sorry Hawaii and Alaska).
  • Amazon's Prime Video service, including Amazon's library of thousands of third-party and Amazon-produced shows and movies. Consumers can also purchase subscriptions to Showtime, Starz, and other services through Amazon Video.
  • Free two-hour delivery on over 10,000 everyday items or participating restaurants through Prime Now.
  • Access to over 1 million songs and curated playlists through Amazon's Prime Music platform
  • Free cloud storage for pictures through Prime Photos.

Since Prime's offerings mirror other paid services -- like Spotify or Apple Music in streaming music, or Netflix in streaming video -- there's clearly a point at which consumers can save money by subscribing to Amazon Prime in lieu of their stand-alone equivalents. Determining whether that's the case for you requires just a bit of back-of-the-envelope math.

Image Source: Amazon.com.

Is Amazon Prime worth it for you?

The problem in figuring out whether an Amazon Prime membership is worth its $100 annual fee is that it depends on each individual's spending habits and preferences. Generally speaking, though, consumers should compare the annual Prime subscription fee against how much they would spend without it on items like e-commerce shipping and other streaming subscription fees. Let's look at this from a few angles.

The first aspect to consider is shipping costs. In a 2014 analysis of major U.S. shipping carriers, Stamps.com found that shipping a 2-lb. package cost on average $7.34 for USPS Priority Mail, $10.45 for UPS Ground, and $10.40 for FedEx Home Delivery. So in a purely dollars-and-cents sense, Prime can begin saving you money if you buy and pay for standard shipping for somewhere between 10 and 14 packages.

Some companies eat a portion of the shipping cost to lower their shipping rates, but the overall point is that one parameter to think about Amazon Prime's membership value is whether your spending on e-commerce shipping exceeds $100 annually. Remember, Amazon offers a huge selection of Prime eligible items, but not all items are sold on Amazon (yet). Also, this doesn't factor in time sensitivity or weight. Heavier packages will increase your shipping costs, as will any 2-day or next-day shipping charges.

The other key variable consumers should compare a Prime membership against is the other streaming services they the use. For instance, a Netflix or Spotify subscription each cost $120 annually. Assuming you can bear to part ways with exclusive content on either service, Prime can offer significant savings to consumers, especially when you also add in the cost of paying shipping and handling on top of this.

Image Source: Amazon.com.

Part of something bigger

The overall point here is that it doesn't take much to save money by joining Amazon Prime in today's digital era. Indeed, this is very much by design. Amazon CEO Jeff Bezos is on record saying he wants the break-even analysis for Prime to be "such a good value, you'd be irresponsible not to be a member." 

This is all the more noteworthy since Amazon likely loses money on Prime, relying on profit centers like its AWS cloud-computing platform to subsidize Prime and Amazon's e-commerce operations. The likely goal here is to incentivize consumer spending to shift increasingly online, ideally specifically to Amazon, in order to gain as much market share in the e-commerce market.

Today, only single-digit percentages of retail spending still occurring online. Therefore, I consistently argue that most people underestimate just how truly massive Amazon's market opportunity is, and the time scale it will take to achieve its long-term objectives.

Call it a hunch, but I think the evidence suggests Amazon wants to become the world's largest retailer, and it plans to use technology and its entrepreneurial side to achieve this on a never-before-seen global scale. As such, Prime is the carrot Amazon has created to bring more consumers into its ecosystem, and the company has certainly made Prime one of the best deals anywhere online in the process.

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Andrew Tonner owns shares of Apple. The Motley Fool owns shares of and recommends Amazon.com, Apple, FedEx, and Netflix. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Stamps.com and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.