Netflix takes smart strategy in latest price increase

04 February 2019

Netlix recently announced it was bumping prices across its three membership categories. But don’t expect the company to suffer a crippling rash of defections. According to a Mark Billige, a pricing expert from consulting firm Simon-Kucher & Partners, Netflix has continually upped its value proposition, while using psychological pricing tactics to soften the perceived blow.

Pricing is one of the big four "P"s of marketing, alongside "product," "promotion," and "place." Firms generally want to find the sweet spot where they generate the most revenue, so they’ll project how many customers they’re likely to lose at a certain price increase, and then do it if the loss of customers doesn’t nullify the gain from higher price tags.

A price increase is the quickest and most powerful way to generate new cash – it costs little to execute and has an instant and significant impact. It’s certainly cheaper and easier to do than a new product or promotional campaign.

Streaming video giant Netflix recently took the step of increasing its prices across the board. Its basic one-stream, standard-definition package jumped from $7.99 to $8.99; the "standard" $11.99 two-stream HD package increased to $13.99 a month; and the "premium" four-stream 4K/HDR package jumped from $13.99 to $15.99.

Netflix takes smart strategy in latest price increase

Netflix clearly believes its customers will bear the slight increase, especially as the firm continues to create and deliver more and more original, exclusive content. The Netflix Originals acceleration is, however, likely tied to increasing migration of licensed content to other avenues – as the hugely popular Disney properties (including those within the Marvel Universe) are set to move to a Disney-owned streaming platform in the future.

Streaming content seems to be heading towards a recreation of the TV channel system, where Netflix will only have Netflix content, just as NBC puts out NBC content – with the occasional weekend movie. For now, Netflix can point to an array of films and TV, as well as its own exclusive content, and say, “Hey, we’re spending a lot of money, and this is still worth it for a couple dollars more.”

Mark Billige, a managing partner at consultancy Simon-Kucher, says that Netflix’s improving value proposition means the company can rely on loyal customers rather than knee-jerk reactions resulting from mass cancellations.

“Subscribers understand all of this comes at a significant cost. For the streaming service to continue upgrading its product, they need to keep prices moving in the same direction as value,” Billige said. “Netflix can rely on tolerant customers, and thanks to the well-deserved cash infusion, can continue enhancing viewer experience. In the long term, everybody wins.”

Another factor that helps customer retention is the streaming company’s detailed price management approach. The basic plan jumps only a dollar, and remains below that psychological threshold of the double-digit $10 – a smart move according to Billige. Meanwhile the standard and premium plans each increase by two dollars.

“At the top end they can afford to push more, with the downgrade path acting as a safety net: Customers who are unwilling to pay the extra two dollars for premium can switch to the standard plan,” Billige said. “So rather than apply the same level of increase across the whole portfolio, they’ve applied psychological pricing tactics to ensure all customer needs are covered. That’s the smart way to roll out an increase.”

Netflix also further softened the price hit by gradually rolling out the increase to existing subscribers over several months.  The company currently has 58 million subscribers in the US.

Markets enthusiastically received the news of the price increase, with Netflix stock gaining 6.5%.

Can’t stand it

Any significant price increase, however, is likely to result in customers dropping said service or product. According to a December study of 1,940 US broadband users by research firm The Diffusion Group, 8% said they would quit Netflix if it increased its monthly subscription price by $1.

As this tracks to Netflix's basic package price bump, the simple numbers are apparent – assuming that the data has any bearing on reality. With Netflix now making 112% as much per account, but with only 92% of the accounts it had previously, it still ends up with 3% more money from subscriptions.