As you can see by the attached image of an email Netflix sent, they are raising prices again. Let’s take a moment to evaluate their implementation’s pros and cons, at least from what we can infer from this email. They said the price increase is to “bring you more great entertainment.” I always find it interesting that companies do this. If you’ve followed me at all, you know I repeatedly emphasize that fixed costs have nothing to do with pricing. Creating new content is a fixed cost and, therefore, not relevant to setting prices. However, it makes a ton of sense to blame a price increase on higher costs. After all, doesn’t this excuse feel good? The real reason they are doing a price increase is that they think they can.
Is Netflix Modeling Effective Pricing Strategies?If you’ve followed the history of Netflix’s price increases, you’ll know they completely messed up the first one. The second one went much better, at least partly because they told subscribers there were raising prices but held the prices constant for current customers for a year. In other words, they did something nice for their customers. They didn’t do that this time. Instead, they sent out this email, which gave about a one month notice. In a recent blog, I wrote about phasing in price increases to current subscribers. It doesn’t look like Netflix did this. My family is not a heavy Netflix user, so it probably won’t hurt our entertainment screen time if we churn. On the other hand, some people thrive on Netflix and probably would never do without it. They would not churn. Netflix could have figured this out based on usage and phased in price increases to find the point where too many subscribers churn to make the price increase profitable. Another reason Netflix probably should phase in the price increase is competition. Their industry is changing rapidly with Apple and Disney launching competitive platforms. It doesn’t feel like the right time to upset customers, even a little. The phased-in approach would let them test the viability of this increase. Overall, I’m less optimistic about this execution but let’s see what happens. Time will tell. Now, go make an impact.
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