Written by Trent Hamm, The Simple Dollar is a popular personal finance blog that chronicle's one man's road back from overwhelming debt to financial security. Hamm declared the contents of the blog to be in the Public Domain in 2008 and available for sharing when attributed properly. We will share a couple of posts a week.
Charlie wrote in with an interesting question.
I wanted to see if you could run the numbers on this. My family is considering signing up for a year of Amazon Prime for $80. I can see a lot of situations where it would save us a little bit of money, but I don’t know if it adds up to enough money to make it worthwhile.
The value of Amazon Prime really, really depends on your buying habits. For some people, I think it’s absolutely worth it. For others, it’s not worth it at all.
First of all, what is Amazon Prime? From the site’s blurb:
AMAZON PRIME OFFERS MULTIPLE SHIPPING BENEFITS, INCLUDING FREE TWO-DAY SHIPPING FOR ELIGIBLE PURCHASES. MEMBERS ALSO GET FREE ACCESS TO AMAZON INSTANT VIDEO AND THE ABILITY TO BORROW BOOKS FROM THE KINDLE OWNERS’ LENDING LIBRARY.
It costs $80 per year for these services. I see a few primary ways in which Prime saves money for families.
First, it enables you to use Amazon to buy individual items for less than $25 without paying for shipping. Without Prime, you have to pay for shipping for items under $25, meaning that there’s often a temptation to add unnecessary items up to the $25 threshold or just walk away and pay more for the item elsewhere, like buying a book at a bookstore. If you have Prime, you’ll likely find yourself doing all of your gift shopping and small purchases at Amazon rather than buying them at stores.
In that situation, you have to start doing some serious price comparison among the items that you buy. The best way to do that is to grab some receipts from your last few weeks of purchases and start comparing them with prices at Amazon. With shipping as a non-factor, can you save money by buying the item at Amazon?
If you’re a warehouse club member, you should include those in the comparisons, too. You should also carefully examine Amazon’s “Subscribe and Save” program on household products, where you can shave 5% to 15% off of the cost of a household item to have it shipped to you on a regular schedule, such as having shampoo shipped to you every two months (for example). If you’re a Prime member, the shipping costs for those things just vanishes.
Another factor that helps Amazon’s case is the cost of going to the store for these items. If you’re sitting at home and you have two or three things you need to buy, Prime can often save you the cost (and the time) of having to go buy those items.
Is that worth it? It really depends on the things that you buy. I will say that the larger your family is, the more likely it is that you’ll find Prime to be worthwhile.
Another factor is the video streaming service. If you’re a Netflix subscriber, this might be a deal-breaker for you. Amazon Prime provides a video streaming service with content that largely (but not completely) overlaps Netflix. Most of the items that my family enjoys on Netflix streaming is also available on Amazon streaming. If you’re spending $9 a month on Netflix streaming, take a serious look at Amazon Prime, as it might actually save you money to switch (as the cost per month of Amazon Prime is about $7).
The Kindle lending library is pretty secondary. If you have a Kindle, it’s worth looking at simply because it gives you access to more “free” books, but I don’t think the value there is worth a significant amount.
I think the value of Prime really comes down to two questions.
One, would you actually save enough money over the course of a year by eliminating the shipping barrier at Amazon? This is a trick question, of course, as it will become easier for many people to shop more if they no longer have to worry about the shipping issue. If you can get anything you want at a pretty good price shipped to your house in two days without any shipping cost, it can be really tempting to buy more items. Self-control is really needed here. On the other hand, if you have that self-control, the small savings on entertainment items, gifts, household items, and other random things will likely add up fast, particularly if you can clearly identify the savings and switch to buying most of those items through Amazon.
Two, can the video streaming service adequately replace Netflix for you? If you don’t use a streaming video service, then this is a non-issue. You certainly have no reason to subscribe to such a service. On the other hand, if you do use Netflix, Amazon Prime provides a pretty strong subset of what’s available at Netflix plus some minor additional items. Is the mix of content on Amazon Prime’s service an adequate replacement for Netflix for you? (Overall, I do feel that Netflix offers better content overall with regards to streaming, but Amazon provides a lot of good stuff and, given the other benefits of Prime, this might be worthwhile for you to switch.)
Would that $80 per year actually add up to more than $80 per year in savings for you? I think that if you have some self-control, you’re willing to buy a lot of your household and other items from Amazon, and particularly if you’re a Netflix subscriber and would be willing to cancel it and jump ship, Prime can be worth it, particularly if you have a large family (and thus a larger household supply budget). You need to run the numbers for your own situation, and the best way to start is with your receipts for the past few weeks.