Earlier this week, Netflix increased their price for their most popular offering by 60%. That move garnered plenty of attention and reaction, some quite vocal. As a Netflix subscriber, I was shocked by the size of the increase, but I have not decided whether to change my subscription, cancel it, or just pay the higher rate. As a pricing professional, I am also interested to see how this works for Netflix. Perhaps writing about it will clarify it all for me.
I subscribed to Netflix for the convenience and the relatively low price of watching a bunch of movies. I originally subscribed to the unlimited, 2-DVDs-at-a-time package, but at the last price increase I downgraded to one at a time, plus streaming. I found it was rare that one-at-a-time would not meet my needs, because I rarely watched movies that quickly in succession. In fact I had one DVD for over a month before I watched it. I also did not stream movies very often, primarily because the selection was small and old. In spite of my subscription, I still use on-demand rentals from my Verizon occasionally.
I have been content to pay my $10 per month, watch a couple Netflix movies, and not be sure whether it was a good deal or a bad deal. One thing about a 60% price increase though – it has caused me to think about the choice, even though the extra $6 per month is really not much. So here are the features I would like:
- Relatively current movies. I would like to see them within a month or two of release to DVD. When they are older and no longer part of the current conversation, my interest declines.
- Ease of obtaining the movies. It is definitely worth something to not have to drive to pick up a DVD and return it.
- Hi-def and Blu-Ray options
- The ability to watch movies on my laptop when I am traveling
- Low price. Like most people, I prefer a low price, but I don’t necessarily want to give up features for that low price.
So, like all customers, I need to weigh the features and benefits I get from my available choices against the prices of those choices.
For relatively current movies, I think Netflix is inferior to On Demand and Redbox. I don’t know what the actual time statistics are, but I certainly notice when I scroll through the list of On Demand movies or look through the list on Redbox, I always find movies that are not yet available as Netflix DVDs. Although the list has been improving, the selection of movies available via streaming from Netflix is substantially worse than those other options. On the other hand, if I were considering Hulu as an option to Netflix, Netflix would win this category by a mile.
Netflix is very easy to use. Simply go online, select the list of DVDs I want, and prioritize them. Netflix will mail them to me. Streaming is also pretty easy from my laptop, but a bit clunky from my Blu-Ray player. On Demand from Verizon, is even easier, though. I click a couple buttons on the remote, scroll through the list, select the movie I want, and it starts very quickly. Nothing could be simpler.
Netflix has Blu-Ray options for most of the current movies. All of the movies in my current queue are available in Blu-Ray. The same is true at Redbox and most everything available On Demand is hi-def. So, none of them have real advantages here.
Watching on my laptop would seem to be easy for all of them, but it is not quite that simple. Netflix sends DVDs which I can take on a trip, but I can’t play Blu-Ray DVDs on my laptop. Clearly I can’t get On Demand from Verizon, but I can get Flexview, which lets me watch movies on my laptop. It is similar to streaming from Netflix, and its movies are not as current as the On Demand offerings. I don’t think Redbox would be a good option for this, because I have to pay for each day I keep the DVD.
If I watch a bunch of movies, Netflix DVD-only could be the least expensive. The break-even versus On Demand is two movies each month. It is a little tougher to calculate the breakeven versus Redbox because I have to estimate how many days I would keep each rental, and if I make a separate trip to pick up or return the DVD, the cost of driving has to be added. At $4 per gallon, it is probably at least $1 or $2 per DVD. So if I watch more than 5 DVDs in a month, Netflix would probably win in the price category.
What does all that mean when I combine all the factors? Netflix is convenient, but probably not a great deal for me. In the last 12 months, I have only received and watched 22 DVDs. In addition, I watched half a dozen movies instantly. When I wanted something more current, I bought it On Demand. At $12 per month for the Netflix package, it was an OK deal. At $18, I don’t think so. Also with the poor selection of instant movies (in my opinion), the $8 per month streaming only option is not viable.
I suspect most customers will go through some kind of analysis like this, although perhaps not as detailed . There will be a bunch of customers who watch several movies each month, and they will grumble about the price increase, but pay it. There will also be a bunch of customers who will downgrade their service to streaming only, or DVD only. And Netflix will certainly lose some customers who don’t watch that many movies and have better economic options elsewhere.
Whether it works for Netflix will depend on how many customers cancel and downgrade. If no customers downgrade, but 37.5% of the customers cancel, Netflix would do better than break even. Total revenue would be the same as before the price increase, but their distribution costs would decrease due to shipping fewer DVDs. My bet is they will not get that many cancelations, but I don’t want to do the math on a mix of downgrades plus cancellations. It also remains to be seen what the competitors do. If Redbox and the cable providers quietly raise their own prices, Netflix will lose fewer customers. If, on the other hand, the competitors aggressively go after more market share, we could see the Netflix package prices coming back down at the beginning of the year.