COVID-19 and the resulting restrictions on public life have

significantly changed customer behavior. It is safe to assume that

certain products and services, like entertainment streaming, have a
much higher value to consumers than before. But how much higher is
that value? Over several years, the global strategy and marketing
consultancy Simon-Kucher & Partners has measured willingness to
pay for Netflix among MBA students. During the pandemic, Netflix’s
pricing power has increased dramatically. Whereas in the past, a 10
percent price hike would have resulted in a six percent decline in
demand, our latest survey shows us that the same ten percent price
increase now would only drive 1.3 percent of customers away.  

[Boston, MA], [June 17, 2020] – Netflix would have room to raise its prices
and still rely on strong sales volumes, according to the results of Simon-
Kucher’s latest trend barometer. The survey, which is conducted three
times a year among MBA students at the London Business School,
measures price elasticity, the mathematical expression of how a product’s
sales volume will change in response to a change in that product’s
price. “The results indicate that price elasticity for streaming services is at
an all-time low,” says Mark Billige, CEO of Simon-Kucher & Partners. “For
the past three years, the calculated price elasticity for a Netflix subscription
was approximately -0.6. But in our June study, we saw elasticity collapse to
just -0.13. That means that for the same theoretical price increase, volumes
would now only fall by about a 1/5th of what we would have expected in the
past.”

Breadth of content more important than price

The survey participants very quickly adjusted their perceptions of price and
value for streaming services as the environment changed; when asked to
rank the most important criteria for choosing between different streaming
services, breadth of content available and access to latest releases were
the first and second most important criteria, whereas price was only fourth
in importance.

With social distancing rules and restrictions on public life imposed due to
the coronavirus pandemic, it is no surprise that customers value streaming
services like Netflix now more than ever. And this value translates into a
higher willingness to pay for the service, too, yet it remains to be seen
whether this is a permanent change in value perception, or just a short term
effect during lockdown conditions.

“While we would need to conduct a more representative study before

making any concrete recommendations on optimal prices, these results
send a very positive message to streaming providers. Consumers are
currently having a crash course in what they can (or can’t) live without. And
streaming services are definitely in the ‘can’t live without’ bucket,” explains
Billige.

Billige recommends that companies in all industries review their price

elasticities. “This crisis just shows us that it’s never been more crucial to
know how customers perceive your products and services when making
pricing decisions.”

*About the survey: The LBS online survey June 2020 was conducted by

Simon-Kucher & Partners as part of a course at London Business School.
It examined the topic of streaming services, in particular the participants’
likelihood to buy Netflix or alternative services under various price/value
scenarios and surveyed 76 MBA students from six regions (Europe, Asia,
North and South America, Middle East, and Australia and New Zealand).
The study has been conducted nine times since 2017.

Simon-Kucher & Partners, Strategy & Marketing Consultants:

Simon-Kucher & Partners is a global consulting firm specializing in TopLine
Power®. We help our clients achieve growth and profit targets by applying
practical, evidence-based strategies. Simon-Kucher & Partners is regarded
as the world’s leading pricing advisor and thought leader. The firm has over
1,400 employees in 39 offices worldwide.

Introduction
This paper will assess the business operations of the Netflix Company from a
microeconomics viewpoint examining and discussing how factors such as products
supply and demand conditions, price elasticity of demand, cost of production,
market entry barriers, market share, and market structure effect Netflix’s performance
in their market. The paper will start with historical overview of the Netflix Company
and conclude with recommendations based on the analysis suggesting how Netflix
could run its future operations to stay competitive in the entertainment market and
Industry.

Company History
Netflix began operation in 1997 as a DVD by mail rental service (About Netflix, 2017).
After many years, it has morphed into the largest online television network, with over
100 million members worldwide which streams over 125 million hours of
programming per day. Its members are able to watch on multiple different devices
from just about anywhere, at any time. These entertainment choices include films,
television, documentaries, and original programming (About Netflix, 2017). With an
enterprise value of $71.47 billion, this internet giant has changed the way we
consume modern media and entertainment (Netflix Enterprise Value, 2017). Netflix
has frequently invested in original programming that is generated strongly based on
the trends of the consumer. This company has market insight that Nielsen ratings
can’t compare with. In addition to the number of people watching programming,
Netflix can also tell when users watch, how long they typically watch for, what people
want to see, and much more. This information is used to provide the highest quality
experience for the consumer. With a large share of the online streaming market
cornered, Netflix has openly said that their biggest current competitor is sleep
(Netflix’s View: Internet TV is replacing linear TV, 2017).

Get Help With Your Essay

If you need assistance with writing your essay, our professional essay writing service
is here to help!

Find out more

Supply and Demand Conditions
Supply and demand is the availability of an outcome for a certain product and the
demand for that product has on cost. Meaning that if there is a low supply with a
high demand the price increases or if the supply is greater with a demand that is
lower than the price will likely drop. When it comes to Netflix and its supply and
demand conditions, you can see that they are also vulnerable to the same supply and
demand stress as other business organizations. Netflix is constantly expanding the
streaming list of content providers along with their competitors such as Hulu,
Amazon Prime, HBO and other premium networks. The demand for growth in these
streaming companies has driven prices upwards over the last few years.

The cable industry, which is what Netflix is classified under, is continuously and
quickly changing.  Advances in technology have driven the demand for cable
television and companies like Netflix to have easily and quickly accessible content. In
1948, cable television originated in Arkansas, Oregon, and Pennsylvania to enhance
poor reception of traditional broadcast television signals in remote areas. (History of
Cable, n.d.) During the 50’s and 60’s, cable subscriptions grew from 14,000
subscribers to 850,000 subscribers. From the 1990’s into the present, cable has
continued to rapidly grow due to the different services that it offered customers.
As customers started demanding higher quality cable service, the demand for basic
cable started to decline. Satellite television originally provided more channels to their
customers which increased the demand for these more extensive systems over the
traditional basic cable system. Due to this high demand, the costs for these products
continues to grow. The latest movement in the cable television industry is media
streaming. This has caused massive growth for Netflix and similar services.

Netflix has positioned itself to be a frontrunner in the media streaming industry. As a

streaming provider, Netflix gives its customers the ability to watch ad free content
from a large array of devices, at any time. This makes for a high demand as it gives
customers more freedom than traditional cable packages. One other factor is the low
cost of Netflix compared to the cost of cable subscriptions. The average monthly
cable bill is over $120, which is more than a $35 average increase from the cost in
2011, while the average monthly fee for streaming services is $8 per month.  With the
demand for streaming services on the rise, it is understandable that Netflix
subscriptions would increase.

If Netflix continues to grow its internet television concept of providing TV shows and
movies that customers demand, it will hold their spot as an industry leader in the
marketplace.  With very strong reception from critics and customers alike, they will
need to continue with the production of original content, such as original TV series
and movies, which have not only increased the demand for services, but has also
increased their profits.

There are few supply issues facing Netflix. In the streaming market, there are few
competing firms that may threaten the market share of Netflix. These firms offer alike
services at a comparable price to Netflix This means that the amount of substitutes
that can supply similar quality services as Netflix are few.  The largest supply issue
Netflix faces is technological change.  However, keeping up relations with various
electronic devices, remaining relevant should be fairly easy.

Price Elasticity and Demand

Price elasticity of demand the relationship between change in the demanded
quantity of a product and a change in the products price. If the price of services
increase, it could affect the quantity of services demanded. There are a handful of
quality substitutes for Netflix. In the cable industry itself, AT&T, Comcast, and Time-
Warner, are all providers of services that compete for the same customers as Netflix.
In the streaming market, Netflix competitors are other content providers such as
Amazon Prime and Hulu. The major factor in this competition is pricing and content
availability.  
In 2014, Netflix increased consumer cost by $1-2 each month. While the price
increase was a risky choice, it was necessary because of the rising prices of acquiring
more content. Before this change, subscription plans for streaming and DVD rentals
rose to $8 a month for streaming and $10 a month for streaming and DVD rentals. In
2011, this was raised again. All subscribers would have to pay $16 a month for both
streaming and DVD rentals which is nearly a 60% rise in cost for the consumer. There
was a large backlash from consumers as they felt that the small streaming library was
not enough to justify those costs. This price increase was a way for Netflix to upgrade
and expand the library content they were offering for streaming. With this price
increase, Netflix lost nearly 750,000 subscribers and its stock tumbled in the
following months. However, with Netflix expanding the production of their original
series, this decrease of subscriber growth was only temporary. Netflix doesn’t appear
to see price elasticity as risk for their organization, but more of a prospect.

As seen on the graph above, the stock and earnings of Netflix have proven to be
growing at a steady rate over the last few years. Netflix has reported that the amount
of watching from the average subscriber has grown in every quarter after the fourth
quarter since 2011. Netflix continues to grow. In Argentina, United Kingdom, Brazil,
Irelands, Chile, and Mexico is expected to make up more than a third of TV in the
average household by 2020.

If Netflix raised prices again, it could cause customers to other platforms because of
the lower cost. On the other hand, if Netflix would lower its price, then the demand
for its service could potentially increase. Netflix is a service that could be considered
a luxury and not a necessity. This would provide Netflix a higher elasticity of demand.
This may not be the case in the future as many people are beginning to use Netflix as
their primary entertainment source. This means that in the customer’s budget, Netflix
has already started to become a monthly expense, replacing standard cable services.
As time goes on, it is expected that consumers will change their spending habits to
completely move away from cable and move directly to streaming services which
would increase the elasticity of Netflix. Although the expense is monthly, it will only
be a small percentage of the consumer budget making it an inelastic demand.
Because the market for media streaming is broadly defined, the number of available
substitutes is low therefore it is inelastic.

Netflix has shown to be profitably consistent, which allows shareholders to expand its
equity as earnings are built up over time making Netflix more valuable. Money is
being spent by Netflix to expand into more international markets after seeing huge
success in its international growth into countries like the United Kingdom, Mexico,
and Canada. This has allowed Netflix to study the trends of consumers across the
world to create content that is palatable in many nations. This expansion should
assist in lowering overall costs and increase the company’s profitability.
Costs of Production
Currently, Netflix offers streaming services on movies and TV shows. They have three
subscription levels: Basic, Standard, and Premium. Netflix is currently working to
grow their offerings and continue with original programming.

The main cost that Netflix incurs comes from the licensing and production of their
streamable titles. The cost of maintaining their content library has been quickly rising
over the last five years as they expand the choices that they are offering to
consumers, which can be seen in the chart below. While the largest cost for Netflix is
their content, they also have various SG&A expenses, otherwise known as selling,
general and administrative expenses. These expenses have also grown as the
demand for their rises. From 2012 to 2015, these SG&A expenses had more than
doubled.

These costs have been growing as the consumer’s demand for more varied content
grows and as Netflix expands into the international marketplace. This demand by
consumers that Netflix has met, has resulted in a continuous growth for the Netflix
Company. In 2016, the COGS had a nearly 32% increase in from the year previous.

These growing costs for the most part have not prevented company growth. As you
can see below, by continuing to increase the content available, Netflix has also
helped itself to create strong sales growth. In 2016, Netflix experienced sales growth
of 30.26%.

Market Share
While Netflix is the largest paid for streaming service, it has a market share of only
around 12.7% (Netflix Inc’s Competitiveness, 2017) . The reason for this is that
Netflix’s marketplace competitors are well established cable corporations and video
providers that have many other products and services that would result in a higher
revenue than Netflix. These companies include Amazon, Comcast, Cablevison, and
Time Warner Cable. Although Netflix has strong sales growth, their profitability is
lower than market competitors, with a net margin of 2.36%. Competitors in this
market have an average net margin of just under 11% (NFLX’s Competition by
Segment and its Market Share, 2017).
Due to the large capital and resources required to enter this market, Netflix will need
to be aware of the streaming services provided by established cable companies and
original content providers. These pose the greatest risk due to their large access to
streamable content and access to existing customers.

The market structure that Netflix operates under is an oligopoly. In an oligopoly,

there are a few companies that control the entire market. In the streaming market,
Netflix, Hulu, and Amazon Are the main competitors. In this type of market, price
wars have a chance of occurring.  This means if one of these companies decides to
drop its prices, the others must also drop prices in order to stay competitive. Taking
a look at the current state of the market, this is evident because all of the major
providers have comparably priced packages for their product. With Netflix being the
market leader, they have large influence over this market. If Netflix decides to reduce
prices, then Hulu and Amazon must also reduce consumer cost or risk losing
customers to Netflix. 

Find out how UKEssays.com can help you!

Our academic experts are ready and waiting to assist with any writing project you
may have. From simple essay plans, through to full dissertations, you can guarantee
we have a service perfectly matched to your needs.

View our services

Recommendations
With streaming quickly becoming the industry standard in television viewing, Netflix
is expected to continue to increase its hold on the industry and market. Their current
COGS while increasing, has provided Netflix a strong advantage in terms of sales
growth due to their original content and variety of offerings. This current strategy
seems to be working well for them. While some of the most expensive options to
produce are original programming, these expensive productions are key to attracting
customers due to the lack of availability from other previously subscribed to
services.  This will also be helpful in further securing themselves in the marketplace.
As mentioned earlier it will also be important for Netflix to keep developing their
technology and continue to partner with different companies to update and keep
their technology modern and relevant.

By persistently providing the services and integration that consumers desire, Netflix
can continue to expand its service to more consumers than it currently does.  If
Netflix can continue to understand the wants of the consumers, then they will remain
leaders in their market.

Citations
About Netflix. (n.d.). Retrieved July 15, 2017,
from https://media.netflix.com/en/about-netflix

Caporaso, T. (n.d.). Netflix’s pricing strategies are bound by the same la

199 Price

Pandemic reason

peer comparison

US inelasticity

Almost a year after introducing a mobile plan made for India at Rs 199 per
month, Netflix is now testing a new plan in the country worth Rs 349 with
HD streaming. This plan essentially sits between the Rs 199 mobile plan
and the Rs 499 basic plan. The new affordable plan from the streaming
giant is set to launch for users in India, the media has reported.
“We launched the mobile plan in India to make it easier for anyone with a
smartphone to enjoy Netflix. We want to see if members like the added
choice this offer brings. We will only roll it out long-term if they do," a Netflix
spokesperson told in a statement to Timesnow.com.
What sets this plan apart from the Rs 199 mobile plan is the fact that the
user can stream or watch content on a phone, tablet, or computer at a time
in high definition. The Rs 199 plan excludes both computers and smart TVs
while the Rs 349 plan excludes streaming only in smart TVs, according to a
report in the Android Pure. The mobile-only plan also offers streaming in
standard definition only, thus, making the Rs 349 plan a better deal.
However, it is not clear whether the plan being tested would see the light of
the day. According to Netflix, it would wait and watch if the Mobile+ plan
gains popularity with its subscribers before it is added permanently to its
subscription plans.