Simon-Kucher & Partners: Netflix Takes the Smart Approach to Price Increase

January 18, 2019

BOSTON--(BUSINESS WIRE)--Jan 18, 2019--This week, Netflix announced the most substantial price increase in its history. All US customers are hit by the move, with increases immediately affecting new subscribers. Even existing members can expect to see the higher prices on their bills in the coming months. Will the knee-jerk reaction be to cancel subscriptions? Actually, thanks to its ever-improving value proposition, Netflix can rely on loyal customers.

After all, it’s no secret that Netflix has been spending money. In recent years, the company has invested heavily in expanding its content selection, releasing its own original titles, and gaining the rights to other popular movies and series. Today’s subscribers get more bang for their buck than they did two years ago, and have been seeing value increase before their eyes.

Subscribers also understand all of this comes at a significant cost. For the streaming service to continue upgrading its product, they need to keep prices moving in the same direction as value. Price is the most powerful and reliable way for a company to generate cash – far quicker and more potent than other initiatives to accelerate subscriber growth, most of which require further investment. Price increases cost little to execute and have significant impact. This way, Netflix can rely on tolerant customers, and thanks to the well-deserved cash infusion, continue enhancing viewer experience. In the long term, everybody wins.

Not only has Netflix significantly improved its value-price relationship, its smart and detailed price management approach ensures the loyalty of its diverse customer base. The Basic plan jumps from $8 to $9 per month, Standard from $11 to $13, and Premium from $14 to $16. With just a $1 increase for its entry price point, Netflix remains affordable for viewers on a budget. Notice how they keep their entry point below $10 and as a single digit dollar? They’ve been careful to remain on the right side of this segment’s price thresholds. At the top end they can afford to push more, with the downgrade path acting as a safety net: Customers who are unwilling to pay the extra two dollars for premium can switch to the standard plan. So rather than apply the same level of increase across the whole portfolio, they’ve applied psychological pricing tactics to ensure all customer needs are covered. That’s the smart way to roll out an increase.

Netflix also avoids any broad brushstroke moves, easing in its customers relatively gently. New customers will face the price increase immediately, while the blow is softened for existing subscribers with the price increase gradually rolled out across the back book over several months. Moreover, Netflix is tackling the increase market-by-market rather than charging in with a global policy. It takes more time and effort to do it this way, but I am sure what they learn in the US will then be applied in subsequent markets.

Unsurprisingly, the markets have also reacted extremely positively. Wall Street has welcomed the increase and the stock is up by 6.5 percent. This demonstrates how a structured and logical approach to increasing prices can have an immense impact: Netflix is not only a company with a phenomenal product, they are also becoming world class in monetizing its value.

Simon-Kucher & Partners, Strategy & Marketing Consultants: Simon-Kucher & Partners is a global consulting firm with more than 1,200 professionals in 38 offices worldwide focusing on TopLine Power®. Founded in 1985, the company has more than 30 years of experience providing strategy and marketing consulting and is regarded as the world’s leading pricing advisor.

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SOURCE: Simon-Kucher & Partners

Copyright Business Wire 2019.

PUB: 01/18/2019 12:32 PM/DISC: 01/18/2019 12:32 PM


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