PRICING STRATEGIES

Netflix restructured their pricing in a big way. They unbundled streaming plans
from the traditional DVD-by-mail business, increasing the price of the combined offering
from $10 a month to $16 a month. And they rebranded their DVD-by-mail business to
Qwikster.
The public reaction was staggeringly negative. Netflix lost a whopping 800,000
subscribers in Q3 2011. Their stock price plummeted immediately following their Q3
2011 earnings release. Over the course of four months, Netflix’s stock price dropped by
almost 80% compared to July 2011. In the chart below, you can see the painful
progression (courtesy of Yahoo! Finance).
 When asked about the 2011 price change, Netflix’s CEO Reed Hastings said he
wasn’t sure if the company had run customer focus groups before announcing the new
plans. If they had run focus groups, he wasn’t sure what those focus groups had said.
All of this uncertainty didn’t instill much confidence.
Fast forward to present day. In October of 2017, Netflix announced another
pricing change. They raised the price of their core Standard plan from $9.99 per month
to $10.99 per month. This change crossed a critical threshold in the minds of
consumers and create a sizable gap in price between Netflix and Hulu Plus (which rings
in at $7.99 a month).

With this new change, Netflix announced that existing customers would be
automatically migrated into new plans – a move in stark contrast to a 2014 pricing
change that grandfathered in existing customers, allowing them to keep lower prices for
two years before being migrated to the newer, more expensive plans.

Given the company’s fraught history with pricing, I could not wait to hear how the
2017 pricing changes are impacting Netflix’s bottom line went. On Monday, January 22,
Netflix announced the results in their Q4 2017 earnings.
By all measures, colossal success. Subscriber growth was not hurt by the pricing
increase whatsoever. In fact, Netflix added 2 million new streaming subscribers in the
US and 6.4 million overseas, 33% more than what Wall Street analysts had forecast.
Both new and existing customers happily swallowed the price increase, which lifted
Netflix’s revenue by 35% (faster than their 25% growth in average paid streaming
memberships).
With more subscribers, and with all subscribers now paying 10% more on
average, Netflix saw a massive increase in profits. Operating income jumped to $245M,
up from $154M the previous year.

Netflix could have taken their pricing windfall and called it a day. It would seem
prudent to avoid rocking the boat knowing that the competitive landscape was about to
get tougher as consumers would now have the choice of new streaming services from
Apple, Disney, CBS, YouTube and many others. But if it worked once, why not try
again?
The resounding success of their 2017 pricing increase gave Netflix the conviction
that they had not yet reached a ceiling on price, the point at which price becomes an
impediment to subscriber growth. They still had room to try their luck again. In January
2019 the company announced higher pricing for each of their plans, which represented
the largest price increase in the company’s history according to Variety. With these
changes, Basic would go up to $8.99 per month (+13%), Standard would jolt to $12.99
(+18%) and Premium would go to $15.99 (+14%). The plans themselves remained
exactly the same as they were in 2017.
 This again turned out to be a major win for the streaming giant. The price
increase announcement had an immediate positive impact on the stock price. In the
company’s first quarterly earnings call after the price increase, CFO Spencer Neumann
indicated that churn levels were very consistent with the 2017 pricing increase despite
the fact that this one was much more significant and even impacted the Basic plan.
Furthermore, the company reported that it beat expectations on both domestic and
international paid subscriber additions (9.6 million versus a forecast of 8.9 million).
References:
https://marketrealist.com/2016/10/netflix-film-strategy/
https://www.nytimes.com/2011/07/13/technology/netflix-raises-price-of-dvd-and-online-
movies-package.html
https://www.nytimes.com/2011/07/13/technology/netflix-raises-price-of-dvd-and-online-
movies-package.html
https://www.wsj.com/articles/SB10001424052970203499704576622674082410578