Revisiting the change in Netflix pricing

The recent changes in Netflix’s subscription pricing is really smart! To summarise Netflix switched it’s model from one price for ‘DVD’s at home’ plus ‘ unlimited streaming’ ( $9.99) to one where a subscriber had to pay 2 separate prices for each type of service($7.99 for streaming and an add on of $7.99 for 1 DVD at a time).- in summary a 60% rise to keep both services. Existing customers can keep their current plan but only upto Sept 1st while the change is effective right away to new customers

 

At first glance the price increase looks anything but smart- in fact it almost looks dumb given the state of the economy/ consumer wallets etc. The popular refrain seemed to concentrate on the aspect of a general ‘price increase’ for the overall service  on the consumer, rather than anything else. Let’s digg around that a little bit to see what makes sense.- Who really won and who really lost

 

 

By last count Netflix had 24 million subscribers. The streaming service was growing at a much faster pace than the DVD service. However the library volumes are still favoring DVD’s- ie streaming titles comprise about 20% of the roughly 100,000 DVD titles.

 

 

So what is Netflix telling us

1) They do not really need DVD only customers

2) They are quite sure they want new streaming customers more than new ‘DVD+streaming’ customers

3) DVD service is costing them more than streaming per title OR streaming costs are growing such that it cannot ‘subsidize’ both services

4) It’s ok if some customers go to competitors for new dvd titles in the short term and retain streaming only

5) We know you consume more titles on the streaming service per month than the DVD only service

 

 

In addition there is a subtle message to the movie studios

1) Your audience prefers streaming so we need more streaming rights and less DVD rights

2) Our audiences are more segmented now into premium(DVD + streaming) and standard( streaming) categories

3) Our goal is to get all titles eventually into a streaming only mode.

4) Streaming might provide us with new sources of revenue in the future- aka advertising and of course usage based pricing

 

 

From a consumer behavior standpoint, there will be some self selection – assume most of the customers retain the standard streaming service and at least 50% retain both services. In effect, Netflix will suddenly gain $7.99 more per month from about 12 Million subscribers and retain 24 Million at roughly the old rate. I can see very few consumers actually canceling the whole service all together- very unlikely.

 

 

It is easy to forget that there are very few alternatives that provide

– enormous depth in titles

– track customer preferences & recommend titles based on usage

– access to so many titles at an ‘all you can eat’ price

 

 

Most of the other services like itunes, Amazon, Hulu etc are still to catchup with that level of capability.

 

 

I think the only looser is USPS, which anyways was shipping fewer and fewer DVD’s- now Netflix is indirectly reducing it’s reported $600 Million in annual spend with USPS- which incidently is 20% of USPS business. If that shrinks to half -say 10%- USPS will be hard pressed to make up that business from alternative sources.

 

 

In summary only a company with a good understanding of customer trends, preferences and operating from an overall position of strength, engineer such a pricing transformation. Streaming only consumers can expect a rapid increase in available titles as hollywood adapts to this change – so in the longer term it is a definite win for subscribers.