Netflix Pricing Mistake?

Only time will tell if yesterday’s Netflix price hike is a mistake or not, but this is certainly a great learning experience.  We can make predictions of the results and then watch what happens.  Topics of interest include price increases, bundling,  segmentation, and most importantly costs.

Price increases – What phenomenal proof of the concepts raised in the post Consumer Price Increases.  That blog described how customers are on auto-pilot with repeat purchases, but when faced with a price increase they re-evaluate their purchase decision.  Read any commentary on the Netflix price increase and you find customer after customer claiming to cancel their subscription.  Even though I’m not effected that much, I’m considering changing or cancelling my Netflix subscription.  The point is the mere act of raising prices is causing many of their customers to reconsider their choices.  Probably not ideal for Netflix.

Bundling – OK, we don’t have all the data, but it sure seems that someone from Netflix should go to bundling school.  Here we have two products that are slightly complementary and slight substitutes.  Meaning, some people who signed up for DVDs enjoy the occasionally streamed video, and some who enjoy streamed videos likely enjoy an occasional DVD.  Put the two together in a package with a slight increase in price and most customers will choose both, not one or the other.  Netflix just forced every one of these customers to decide if they wanted one or the other or pay for both separately.  Possibly another solution would have been to slightly raise the bundled price, and be sure to offer each package separately.  The key here is to continue offering the bundle.  Netflix just killed the bundle.

Segmentation – I wish I had all of Netflix data right now so I could figure out what they are thinking (or not).   There are customers who currently buy the bundle but mostly use streaming.  There are those who buy the bundle but mostly use DVDs.  There are those who are heavy users of both.  I can understand why they might want to raise prices on those who are heavy users of both services, but not those who lean heavily one way or the other.  A small incremental price for a service rarely used seems like a great deal.  (I speak from experience in that they bundled streaming with my DVD’s, but I rarely use it.  So they have been receiving an incremental fee from me for months.)

Costs – More data I wish I knew.  How do they pay for the license to stream?  Is it per view or is it per subscriber?  This is actually an important question.  If it is per subscriber, then Netflix may have to “allocate” a large portion of each subscriber’s fees to pay the licenses.  In other words, they depend on say $5 per customer just to pay the content providers.  If this is the case, then a heavy DVD user (and light streaming user) may be a customer who costs them money to serve (i.e. no profit).

However, if Netflix pays per video streamed, then this is an amazingly bad decision.  Heavy DVD users don’t watch many streams and heavy streaming customers don’t watch many DVDs.  Why not take the incremental $2 per customer?   My guess is Netflix pays a fixed fee and them a small incremental per view fee after that.

I honestly want to scream when I read “Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs.”  Are you serious?  Instead of streaming plus $2 for DVDs, what about DVDs plus $2 for streaming?  I would love to know their costs for serving each streaming customer.

From what I’ve read, it seems that Netflix’ goal is to get more people to move to streaming only.  However, the complaints with content and quality make it unlikely they will replace DVD’s completely.  They created a plan to force customers to choose quickly.

What would you do if you were Netflix?

Here is my proposal:

  • Raise the prices on the bundle by $1.
  • Make sure there is a DVD only plan available for $7.99.
  • Next year, raise the price on the bundle and the DVD plan by $1 each.
  • Do it again the next year.
  • Do it again the next year.  (Eventually the DVD business will be gone.)

These small price increases would move their customers in their strategic direction without alienating them so badly.

The best part about this whole situation … time will tell us what happens with the Netflix pricing decisions.  I believe Netflix will be pretty badly hurt by their decision.  You may recall a recent blog where I adamantly stated “Customers HATE price increases.”  My prediction?  Netflix will change this policy soon.  Let’s see what happens.