It was an e-mail that would cost folks $4 billion in total...
Yet, no one even blinked an eye. Instead, members just made sure their credit card on file was up to date so their service wouldn't be interrupted.
E-commerce giant Amazon operates an amazing business – one that folks can't live without.
Earlier this month, Amazon sent out an email to its Prime members telling them about a price increase. The email said that as of February 18, the monthly price of its Prime membership would increase from $12.99 to $14.99. The price of the annual Prime membership would increase from $119 to $139.
Now, $20 more a year doesn't sound all that significant. But at last count, Amazon has more than 200 million Prime members...
So just with one simple e-mail, Amazon will make $4 billion – with no additional capital expenses.
And like I said, there's been no uproar from Prime members. There haven't been any boycotts or protests. I'd be shocked if there were many – or even any cancellations.
Most folks can't live without Amazon Prime. It's integrated in our day-to-day lives.
Think about it... We've all come to expect free two-day shipping when we order online. Anything else would be devastating.
Prime Video, which is included for Prime members, has become a streaming service we can't live without as well. Prime Video is coming out with a new Lord of the Rings series called The Rings of Power later this year. Given the popularity of the original Lord of the Rings and The Hobbit series, fans are surely not going to cancel their membership because they have to pay $20 more a year.
They'll gladly pay it.
In fact, Amazon could send out another email in a few months saying that they are raising prices again... And there would likely be a similar reaction. Customers would be fine paying it.
This is what's known as pricing power.
Pricing power simply refers to a company's ability to raise prices without reducing demand for the products it sells.
This is hard to find. Most companies can't afford to raise prices frequently because their customers would just walk into their competitor's doors.
Amazon doesn't have that problem. Its customers are "sticky."
Companies that have pricing power are the ones you want to own today.
The reason is because companies that have pricing power are the ones that can survive inflation. And it's no secret that inflation is running wild today.
When the cost of raw materials or wages go up, margins go down. Companies' bottom lines are hurt and that's why inflation can be so deadly.
The best businesses, however, can simply pass those costs onto the customer. They raise prices and that keeps margins high. Then the company is able to keep rewarding its shareholders by paying dividends, buying back stock, and reinvesting in the business.
With inflation running at 7.5%, you need to own stocks with pricing power.
Most economists will agree that we're likely close to peak inflation today. And I tend to agree with that. But that doesn't mean inflation is just going to go away tomorrow.
There will still be intense inflationary pressure in the economy, but less than the recent 7.5% level. That doesn't mean 1% or 2% inflation, at least not for a while. My estimate is that we'll see inflation of about 4% or 5% for a few years.
That's still significant.
Yesterday during a special briefing, my colleague Matt McCall talked about what inflation and interest-rate hikes will do to the market, if he sees trouble ahead, and the best place to put your money now.
What We're Reading...
- Inflation is great if you have pricing power. Just ask Mercedes.
- Amazon increases the price of Prime nearly 17% to $139 per year.
- Something different: Germany blocks opening of pipeline as West responds to Russian moves in Ukraine.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
February 23, 2022