Netflix: the smart way to increase prices

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Netflix prices are going up. This week, the streaming service raised the prices of all three of its US plans, constituting a jump of between 13 and 18 percent – the biggest price hike since Netflix launched in 2007. Mark Billige, pricing specialist and Managing Partner at Simon-Kucher & Partners, explains how Netflix’s smart approach is key to gaining customer acceptance.

This week, Netflix announced the most substantial price increase in its history. All US customers are hit by the move, with increases immediately affecting new subscribers. Even existing members can expect to see the higher prices on their bills in the coming months. Will the knee-jerk reaction be to cancel subscriptions? Actually, thanks to its ever-improving value proposition, Netflix can rely on loyal customers.

After all, it is no secret that Netflix has been spending money. In recent years, the company has invested heavily in expanding its content selection, releasing its own original titles, and gaining the rights to other popular movies and series. Today’s subscribers get more bang for their buck than they did two years ago and have been watching value increase before their very eyes.

They also 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. Price is the most powerful and sure-fire way for a company to generate cash – far quicker and more potent than other initiatives to accelerate subscriber growth, most of which require further investment. Price increases cost little to execute and have massive impact. This way, Netflix can rely on tolerant customers, and thanks to the well-deserved cash infusion, continue enhancing viewer experience. In the long-run, everybody wins.

Not only has Netflix significantly improved its value-price relationship, its smart and detailed price management approach ensures the loyalty of its diverse customer base. The Basic plan jumps from $8 to $9 per month, Standard from $11 to $13, and Premium from $14 to $16. With just a $1 increase for its entry price point, Netflix remains affordable for viewers on a budget. Notice how they keep their entry point below $10 and as a single digit dollar? They’ve been careful to remain on the right side of this segment’s price thresholds. 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. 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 avoids any broad brush moves and is easing in its customers relatively gently. New customers will face the price increase with immediate effect, whilst the blow is softened for existing subscribers with the price increase gradually rolled out across the back book over a number of months. Moreover, Netflix are tackling the increase market-by-market rather than charging in with a global policy. It takes more time and effort to do it this way, but I am sure what they learn in the US will then be used in subsequent markets.

We anticipate seeing these price increases rolled out in the UK, but would expect Netflix to take a localised approach based on their learnings in the US. What this means for the competitive landscape remains to be seen, but raising prices will provide Netflix with additional money to invest back into their content, something that resonates strongly with their customer base. Furthermore, even with the price increases, Netflix will remain excellent value for money compared to some of the incumbents, with no lengthy contracts for customers to negotiate.

Unsurprisingly, the markets have reacted extremely positively to this news. Wall Street has welcomed the increase and stock is up by 6.5 percent. This just shows how a structured and logical approach to increasing prices can have a massive impact: Netflix is not only a company with a phenomenal product. They are also becoming world class in monetising its value.