Netflix Price Increase – It is like Starbucks

netflixThere is one brand that is prominently written about in this blog on how clinical it is in executing effective price increases. That brand is Starbucks.  From their very first increase to the one after and another we saw how they made it happen. Now Netflix is joining that elite league. Yesterday it announced a price increase of $1 or 11% and saw its stock shoot up 5.4%

Last year I wrote in detail about their first price increase. Three things that I called out then are the same that stands out this time. This is no secret or anything new in implementing effective price increases. These three are the salient aspects,

  1. Reference PriceReference price is what the customer is used to paying for a service. Any increase is seen as a pain. Like last time, it did not increase price for its current 90 million customers. It is the price for new customers who don’t have the lower reference price.
  2. Giving Customers Options – The price increase is effective on only one of the three options. New customers still have the option of lower priced version.
  3. Value Messaging – Netflix prominently says its cost structure for new content is the reason and then shows the value add from all the original content to justify price increases.

Same 3 principles. Same as Starbucks.

If you look closer you will see the finer details.

  1. The version they chose to price optimize is the most popular one. Their data must indicate it is price inelastic or at least it is priced at inelastic part of demand curve. That is they can increase prices without adversely affecting new subscriber adoption.
  2. This also helps to fix a pricing inefficiency in its 3 versions. At previous prices there was not enough value capture for the middle version with just $1 difference from the highly limited $7.99 version. While it made sense then to get more to choose the middle version the newer customer mix is likely not going to be tempted by the SD only and single screen version so it is better to capture that value at higher prices.
  3. Finally by setting a $9.99 price that is closer to $11.99 price for its best version it may cause some to select that as we have seen in 16GB vs. 64GB iPhone.

Let us do some simple math on why the stock market thinks this is good. Netflix plans to add 4 to 5 million subscribers a year. If we assumed 20% of those who would have selected the $8.99 version would now choose $7.99 version , 20% would choose $11.99. Then it has to lose more than 9.9% of new subscribers before this price increase results in net loss. While the drop may be higher than that initially,  a quarter down the line there won’t be any drop.

Net effect is price increase done right.