What Damage Could Netflix See From Price Hikes?

May 08, 2014
By: Gary Kim

Subscription service price hikes often are troublesome in markets where there is significant competition, since customer defection is a possibility. And Netflix will over the next year or two find out what higher prices do for take rates and churn.

In a recent survey, 14 percent of Netflix consumers who use the streaming service said they would cancel their subscriptions if the monthly price climbed by $2.

The YouGov survey also found that if prices were hiked by $1 a month, just six percent of Netflix streaming customers reported they would cancel their subscriptions.

Netflix ran into a huge problem when it repriced its services to emphasize streaming delivery in 2011, you might recall.

Netflix lost about a million subscribers after the 2011 pricing change was announced, while the Netflix stock price plunged more than 80 percent before rebounding beginning in August 2012.

In that move, Netflix eliminated a popular “DVD plus streaming” plan costing about $10 a month, in favor of separate DVD rental and streaming plans each priced at about $8 a month.

But Netflix, more than most firms, understands how a key pricing change can have important ramifications, at least in the short term.

This time around, Netflix will apply the higher charges only to new customers, grandfathering existing users for perhaps a year or two. And Netflix is not talking about potential 60 percent price hikes, but something more on the order of 13 percent or 25 percent, on a base of $8 a month or $16 a month.

In its first quarter of 2014, Netflix added four million net new streaming subscribers, up from about three million steaming customers, year over year.

Netflix gained 2.25 million net new U.S. subscribers and 1.75 million international subscribers, for a total of 48 million global members, including 35.7 million in the United States.

In 2013, about 30 million of those customers bought streaming plans, compared to about 7.5 million customers on DVD rental plans.

But Netflix is growing, arguably a result of providing a reasonable price-value relationship, and plans what might be considered modest price increases.

As a rule of thumb, raising prices for a product people want will tend to depress volumes purchased. But consumer appetite for video entertainment tends to suggest value is high enough, in most cases, to overcome price resistance. At least, that is what one historically would have predicted, given virtually annual price increases for cable TV, satellite TV and telco TV subscriptions.

Netflix might find similar results, this time around. And its last major pricing adjustment, which was more profound, had a significant immediate subscriber impact, but no lasting damage.




Edited by Maurice Nagle