Defense

A Pricing Snafu at Netflix

14 Jul , 2011  

Netflix’s new pricing plan is not going over particularly well with customers.

Yesterday the company announced that it was separating its DVD and streaming services and increasing the cost of the combined offering from about $10 per month to about $16 per month.

While Netflix pointed out that the price of a DVD-only plan is actually decreasing, consumers seem to be focusing on the price increase of the combined plan.

So far the new pricing plan isn’t proving to be too popular; Netflix is getting a rather dramatic backlash from consumers. In the last 24 hours, 58,464 people have posted comments on the company’s Facebook site, most protesting the move. As one person wrote: “This increase is ridiculous. I will cancel my service at the end of the month. I refuse to pay more!”

There is a lesson here: be careful when pricing new products. Netflix introduced streaming as an add-on to its DVD deals. There was logic to this move at the time; streaming was unproven, with a limited number of choices. But it taught consumers to think of the two products as a package. Trying to reverse this is a huge challenge.

It is much easier to reduce prices than it is to increase them. Netflix may have dramatically underpriced streaming when it first introduced the product, creating the problem it faces today.


7 Responses

  1. Dan Balcauski says:

    This post might show an alternative scenario not really considered before: https://abovethecrowd.com/2011/09/18/understanding-why-netflix-changed-pricing/

    • Tim Calkins says:

      Dan—An interesting perspective! It certainly would explain the need to split DVD and streaming.

      If this were the case, I’m not sure why Netflix didn’t explain it (and why they combined the move with a significant price increase).

      Tim

  2. Linda Hall says:

    Netflix has given their most profitable customers a good reason to reconsider their subscriptions. I am a Netflix subscriber. I pay $9.99/month for my subscription. I can order 1 DVD at a time; the addition of streaming was a bonus.

    Now I do a little streaming and a little renting of DVDs but not enough in either account to merit the size price increase they implemented. I was fine with renting a DVD and then not watching it for weeks or months. I liked being able to stream but wasn’t really happy with the selection. Adding streaming made me realize that mailing DVDs back and forth wasn’t really meeting my needs. The fee increase got me to start asking myself whether Red Box, On Demand or even the local library were better options given how little I watch.

    So, Netflix took me, a subscriber who rarely used their service but gladly paid for it, and has given me a reason to reconsider if I should be subscribing at all. Instead of making me happy that I can now go back to my original service for less money, they’ve shown me why I should be less satisfied with that option.

    The bottom line is that Netflix will probably be fine in the short term. The number of people who pay the price increase will offset the the defectors. In the long run though they’ll need to provide outstanding customer service, selection and innovation because they have just created a large pool of people who are open to considering many other options to meet their needs.

  3. Oleg Rusu says:

    I think that there is a strong disruptive network effect at work here.
    The short term net effect for Netflix profitability is neutral-to-slightly improved.The long term effect, however, will be informed by the market. By pricing the two rental options similarly, Netflix is trying to force the polarization of the market, to inform its strategy going forward.

    Here is why:

    Rational behavior would suggest that if there are more and better titles in one media format, for example streaming, per customer dollar spent, i.e. the utility of streaming is higher, customers will switch to the streaming plan. If the utility of DVD rental is higher, customers will gravitate to the DVD plan.

    Even if the market splits in half, the expected revenues per customer will be no less than $8, with a swing from $8 to $16.

    Long term the biggest risk for Netflix will be the availability of titles for streaming. If there are more titles available for streaming than for DVD, what Ben describes is a brilliant strategy. However, if the opposite is true, Netflix is at seriously risk of hurting its streaming profits.

    Arguably, by dropping the DVDs, Netflix could gain leverage in pulling DVDs to streaming faster, which in turn improves the streaming portfolio and Netfilx wins. However, should the studios have the upper hand, Netflix could end up foregoing the economies of scale that DVD rentals offer, having to settle for lower profits in the future. Clearly, my last argument makes sense, if, and only if Netflix currently buys the DVDs from the studios, and pays a smaller royalty per rental (if any) than under streaming.

    In the end it all hinges on the future streaming fees negotiated with studios. Once the transition from DVD to streaming if complete, I believe that Netflix should expect a zero-to-slightly positive net effect per title viewed.

  4. Benjamin Thompson says:

    Oops, sorry for the double post. I thought I was editing. The perils of posting from your phone…

  5. Benjamin Thompson says:

    This is an incomplete reading of the situation in my opinion. Netflix is killing the DVD business, and it’s very much intentional.
    – the numbers are already dropping, increasing the impact of the DVD operation’s substantial fixed costs
    – this will drive more people to streaming, which will both increase Netflix’s leverage in its negations with the studios and better spread the massive increase that’s coming in their streaming rights fees

    Netflix, like Apple, is taking the attitude that it’s better they kill their own business on their own timetable then to see it slowly whither away until it’s nothing more than a ball-and chain. And those customers that are complaining? Netflix probably doesn’t want them anyways (Netflix has a large set of unprofitable customers on the DVD side of the business).

    I hope this sort of strategic thinking and proactive behavior will be held up as something to be admired and learned from, not as a cautionary tale that implicitly encourages holding onto what worked before.

  6. Benjamin Thompson says:

    This is a completely wrong reading of the situation in my opinion. Netflix is killing the DVD business, and it’s very much intentional.
    – the numbers are already dropping, increasing the impact of the DVD operation’s substantial fixed costs
    – this will drive more people to streaming, which will both increase Netflix’s leverage in its negations with the studios and better spread the massive increase that’s coming in their streaming rights fees

    Netflix, like Apple, is taking the attitude that it’s better they kill their own business on their own timetable then to see it slowly whither away until it’s nothing more than a ball-and chain. And those customers that are complaining? Netflix probably doesn’t want them anyways (Netflix has a large set of unprofitable customers on the DVD side of the business).

    I wish this sort of strategic thinking and proactive behavior would be held up as something to be admired and learned from, not as a cautionary tale that implicitly encourages holding onto what worked before.

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