Signing up for Amazon Prime may have seemed like a money-saving move during the last-minute holiday rush. In 2014, it could be a budget buster.
Amazon announced last week that the $79-a-year program had a "record-setting holiday season." Prime members get free two-day shipping on eligible items, free streaming of 150,000-plus movies and TV episodes, and free e-book borrowing from a library of more than 475,000 titles.
According to the company, more than 1 million people signed up in the third week of December alone.
"That's pretty powerful, and I think it speaks to just how compelling the value proposition of Amazon Prime is," said R.J. Hottovy, director of consumer equity research at Morningstar.
Many new members likely were swayed by promises of fast delivery as the holiday approached (though problems with UPS delivery meant that didn't happen for some). Others may have been sold on the free shipping, given that Amazon raised the free-shipping minimum to $35 from $25 in October. And some may have received Prime as a Christmas gift—an option the online retailer introduced earlier in the season.
New members shouldn't necessarily count those perks as money saved, though. Membership can be valuable to shoppers, including students and Kindle Fire owners, who get extended free trials and extra discounts.
But Prime members are also valuable to Amazon. They shop at the site more frequently and across more categories than nonmembers, Hottovy said. And they spend much, much more.
Overall, Amazon customers spend an average of $968 on the site annually, according to a study from Consumer Intelligence Research Partners (CIRP) released Dec. 23. That figure includes Amazon Prime members, who spend an average $1,340; Kindle device owners, who spend $1,233; and Amazon Visa cardholders, who lay out $1,529.
Customers not in any of those groups spend an average of $529.
"You're going to spend a lot more money on Amazon by the time you're done," said Mike R. Levin, partner and co-founder of CIRP.
An Amazon spokeswoman said the company values its Prime members and continues to add value to Prime memberships with new features and more fast-ship items. "Our members have an amazing appetite for this express shipping in particular," she said.
Sure, some of that might come from consolidation of purchasing previously done elsewhere. But not always.
(Read more: Online shopping grows, with some growing pains)
Most Prime members use the free streaming videos to supplement rather than replace a paid Netflix subscription, Levin said. On a monthly basis, Prime members also buy or rent video content from Amazon five and a half times as often as nonmembers, according to CIRP data.
"If they can't get something for free on Amazon, they'll buy it," Levin said. "Amazon is creating people who are comfortable downloading lots of video."
Prime membership also makes options such as having a Kindle or store-branded Visa more attractive, further boosting spending. About 11 percent of Amazon shoppers have both a Prime membership and an Amazon Visa card, according to CIRP's study.
Figuring out whether Prime will be more of a savings or a spending enticement can be tough to gauge. Amazon has a complex system of shipping fees that vary by category and number of items per order.
Plus, the $35 free shipping minimum is often easy to hit. Two-day shipping rates range from $5.99 to $12.49 per shipment, making Prime pay off in as few as seven single-item orders or as many as 14.
"It won't be worth it to people that don't buy much," Levin said.
When it comes to streaming video, Amazon Prime works out to $16.88 cheaper a year than Netflix's $7.99-a-month unlimited streaming.
But the two companies have different libraries of titles, meaning value will vary by viewing habits. Watching Season Three of "Downton Abbey" is free for Prime members, while nonmembers pay either $1.99 per episode or $14.99 for the season—and more if they want to watch in HD. "Marvel's Avengers" is free for Prime, but nonmembers can only buy, not stream, the title, for $14.99.
With cases like that, a Prime membership could pay for itself in six movies or a TV series—except that many new releases aren't among the free titles for members.
"They're hoping as you get more familiar with using the Prime video offerings, you'll move into some of the new releases," Hottovy said.