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Raul Herrera
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There are four pillars of reasoning that Netflix is leaning towards that explains their current setback. First, the slowdown in the addressable market directly correlated to connected TVs; it believes this will improve over time. Secondly, it has 222 million paying households, but a further 100 million are benefiting from password sharing and not being monetized. Thirdly, competition is indeed more intense with new entrants from Disney+, Hulu, and HBO Max. And lastly, it refers to macro factors such as geopolitics, namely pulling out of the Russian market altogether, which amounts to nearly 700K users lost due to the political climate surrounding the Ukraine crisis.
So what should Netflix do? Should they change subscription models? Introduce ads? To cut through this, I spoke with Nick Cherrier, Asia-Pacific Chair of the Subscribed Institute, and a recognized expert on pricing and packaging having spent time at Simon Kucher & Partners and at News Corp. Below we went over some lessons that apply to even the broader streaming industry, and really any industry testing new pricing. Spoiler alert: we get into pricing strategies.
Maybe they could have multi-user plans? Perhaps 2, 3, 4 people, families or groups at different price points? You could argue this is already the case. You can create up to five user profiles and depending on your plan (thus price point), have the ability to stream shows across 1, 2, or 4 devices simultaneously for basic, standard and premium respectively. I think the password sharing issue is that the pricing may be off for people using one account across several households. This is what I believe they should, and plan to tackle.
Netflix follows an evergreen model, so the benefits of an annual plan are limited for them if they also offer a monthly plan. You would expect subscribers to simply choose the plan they prefer, and arguably those with a high probability of churning in the short term will opt for the monthly plan regardless.
Alternatively, Netflix could fence a premium offering with additional features behind an annual subscription. This could drive adoption to it and therefore boost retention, but consumers could also react negatively to an attempt to lock them into longer contracts. In the current context, analysts may smell blood in the water.
How about bingeing? I think when Netflix had no competition, bingeing was fine. But now that people have an incentive to swap back and forth between services, I'm not sure dropping all episodes in a season at once makes great sense. I'll sign on for a month and binge some shows and then cancel. Again, this all goes back to better churn management.
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The bad news about Netflix pricing is that its price hikes and raises seem inevitable. For all the new shows and movies that the big red streaming machine gets, this is an understandable downside for one of the best streaming services. That said, the cheaper Netflix with ads is here, and it's ... well, not great.
The latest news on Netflix's pricing is the death of the ad-free basic tier. Now, there's just Standard with Ads. If the company will continue to spend, spend, spend on its ever-growing library of exclusive Netflix Originals its subscribers will keep footing the bill.
On top of that, Netflix is charging $8 per month to add a household, as an "extra member." This is meant to curb account-sharing, one of the Netflix tricks we've previously recommended to get the most out of your monthly payment. And since we're in a moment where it seems many are starved for more Netflix, most people will likely keep paying for the service.
This is all happening after the most-recent Netflix price hike hit new subscribers in January 2022. Perhaps it comes as no surprise that this led to Netflix announced its first subscriber loss in over a decade. And as we'll detail below, this isn't the only Netflix price increase in recent history.
Netflix isn't the only streaming service raising prices, as a $1 per month increase just hit Peacock. So, let's break down the new pricing, how much of a jump it is off of last year's pricing, and what you get.
Netflix's most popular plan, the $15.49 per month Standard tier, gets you up to two streams at once in up to Full HD (1080p). It's likely the most popular plan for two reasons. Firstly, the proliferation of 4K TVs and 4K content isn't going as fast as some may want. Also: people may just not need the four simultaneous streams and 4K HDR quality in the Premium plan.
Netflix's rules for downloading episodes on devices differs by your plan. Standard with ads subscribers can't (because ads need to be served live), Standard subscribers get to download on 2 devices and Premium get six (formerly 4).
Over time, we've seen small and large gaps of time between Netflix price increases, and the most recent increase was one of the shortest, at 15 months (the same gap between its 2017 and 2019 increases).
Based on recent history, we wouldn't expect a Netflix pricing increase until fall 2023. It could happen sooner, especially if Netflix's games becomes something it thinks it can charge more for. But for now, it seems like we'll be waiting a little bit before Netflix pricing goes up again.
Somewhat similarly, when Starbucks raised its prices during the beginning of 2010, it lowered the price of a tall regular to $1.70. But, if you wanted a splash of foam, a shot of espresso, or a touch of flavor, the addition could be expensive. For a triple grande soy vanilla latte, you would have paid a whopping $6.25. Their goal, I suspect was to attract coffee lovers who would spend a little and those who would spend a lot. For a basic cup of coffee, the price would be low. However, those who were willing and able to pay more would also be satisfied. In that way, Starbucks could retain a dual clientele.
Netflix and Starbucks are engaging in what economists call price discrimination. Defined as selling the same (or almost the same) good or service at different prices, price discrimination differentiates among customers. The perfect example is movie tickets. Movie theaters discriminate by charging senior citizens less.
In economics textbooks, price discrimination is typically discussed in chapters on monopoly. A monopoly and a smaller firm with a unique good or service have pricing power that enables them to target different customers with their prices and coupons. The other economic idea we can cite here is elasticity. The following econlib graphs show the difference between the people opting for $6.99 (the Normies) and those that stick with the pricer possibilities (The Nerdies):
My soiurces and more: My Saturday favorite, the Slate Money podcast alerted me to the Netflix decision. From there, for detail, CNBC and NY Times articles were ideal. Then, do take a look at the past econlife that had my Starbucks facts and this Econlib on price discrimination.
On February 22, 2023, Netflix announced a new pricing strategy that will significantly cut subscription prices in over 100 countries. The move is an attempt to stay competitive in the increasingly crowded streaming market, where rivals such as Disney+, Amazon Prime Video, and HBO Max are gaining ground. In this blog, we will explore this new pricing strategy and what it means for both Netflix and its customers.
Customers are calling it quits amid a slew of changes in the entertainment industry. Gone are the days of companies shelling out untold riches to create content and pay for top-notch talent in the hopes of attracting new customers; now they're under pressure to actually turn a profit. That means less new content, more ads, and higher prices.
The companies are instituting a number of changes to attract (or in many cases, re-attract) viewers, including offering cheaper, ad-supported streaming options and combining with other companies to provide more content for the customer's dollar.
All that said, while consumers might be cutting back on some streamers, they're not cutting them out entirely: In fact, Americans are watching streaming services more than ever. According to Nielsen data, streamers accounted for a record 38.7% of Americans' viewing time in July, with YouTube TV and Netflix leading the pack. (Its lead over broadcast and cable has fallen a little since then.)
Streaming was an attractive proposition to viewers when subscriptions were relatively inexpensive and content libraries were vast. But there are more companies with streaming platforms, and they have been steadily raising prices, making it less affordable for fewer options. One example: When Disney+ was introduced in 2019, it cost $7 per month. Just a few years later, the ad-free version is double that.
While some consumers might not have worried about the cost when the services were cheaper, even news of a price increase can cause them to reevaluate whether or not they are actually using and getting value out of a certain streaming platform.
Many streamers, including Disney, Hulu, and Netflix, offer ad-supported and ad-free streaming packages, with the ad-free option typically costing a few dollars more per month. But it's getting increasingly expensive to avoid them.
Of course, ad-supported streaming is cheaper than its ad-free counterpart. Antenna's data shows that more and more people are opting for the less expensive plans (the companies' public statements back that up). That works out well for the entertainment companies; they make more off of the ads than they do subscriptions.
"The subscription model is not economically viable at current pricing," says Keith Valory, CEO of streaming service Plex, noting that when cable reigned supreme, providers received their portion of the subscription cost plus ad revenue, and churn was negligible. Now they are relying more on subscriptions when churn is high. "It's unsurprising that all these guys are talking about or starting to include ads in their subscriptions."
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