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Netflix Raising Prices is a Strategic Move, Not Just Revenue Growth

by User Not Found | Jul 15, 2011

I know a lot of folks out there are furious about the dramatic price rise of Netflix services. As a user, I'm in the same shoes. Nobody wants to pay more and not receive more. A lot of people argue that Netflix is making a wrong move, as this can terribly hurt their relationship with the loyal customers and could result in many consumers cancelling the service and leaving the company financially hurt. 

But I believe the move has long-term strategic importance to the company. Plus, in the short term they could end up making more and cost less with fewer subscribers. The original price of the most common plan is 1 DVD at a time + streaming, which cost $9($8.99) per month. Now the price for the equivalent service combination goes up to $8 ($7.99 for streaming) + $10 $8 ($7.99 for 1 DVD) = $16 per month. This is a 100% 78% rise in price. Then Netflix loses $1 per subscriber for those who cancel the DVD service. But they will make $7 more on those who stick with the price rise. While I usually don't like to use our competitors' data, TDG group is doing a good job this time by releasing a timely figure that 44% of dual-service Netflix users are likely to cancel DVD and go with streaming only. If we assume this figure goes up to 50%, Netflix will lose $1 per month from 50% of its existing customers, but gain $9 $7 from the other 50% subscribers. In the end, they will make $8 $6 more from 50% of their users, which is $4 $3 more per user at large. On the other hand, the cost for delivering DVD content to 50% of their users is saved. 

In the long run, Netflix is trying to push the trend of online video streaming. As one of the biggest concerns for the company is the rising content cost, Netflix faces tremendous challenges when they try to strike deals with content owners, who argue that their biggest revenue source is still from selling DVDs. Therefore, it is in Netflix's best interest to accelerate the transformation of content from physical format to digital, as they are the predominant player in the online video streaming space. If DVD or Blu-ray disappered, content owners would have much less options when it comes to content distribution. In this case, Netflix would be in a better position in negotiations and could potentially reduce their content acquisition cost and get more new titles into their library. The price rise does exactly this, as consumers go with the streaming-only service in favor of the DVD service. Streaming is Netflix's lifeblood, and it can get better content deal when streaming prevails. 

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