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Netflix to raise subscription prices for new members

April 22, 2014

Typically when a company offering a service puts out offers for new members, it gives them special introductory rates to try the service. This might put off regular members who pay a higher fee a bit, but they understand the method behind the offer. Now comes word that Netflix is going to raise its price for a subscription by $1 to $2 a month, but just for new subscribers. Its current members will continue to pay $8 a month for the next year, before facing an increase themselves.

Netflix is positioning the price increase as a means to help the company license more and better content, while developing more original series such as the hit "House of Cards" starring Kevin Spacey.

"If we want to continue to expand to do more great original content, more series, more movies, we have to eventually increase prices a little bit," Reed Hastings, Netflix CEO, said in a video conference call with analysts. "You're talking about a dollar or two difference per month, so I don't think that it's a huge difference."

Investors were pleased with the Netflix price hike. The company's stock price rose nearly seven percent in trading after the announcement yesterday.

"The earnings leverage of even just a dollar is pretty substantial," said Daniel Ernst, an analyst at Hudson Square Research told Bloomberg News. "For what Netflix provides, it's an incredible value for consumers."

Netflix's steaming video service grew by 2.25 million members in the U.S. during the company's first quarter. Membership outside the U.S. grew by 1.75 people during the same period.

One concern with the higher price for new subscribers is that it will slow the number of new members who join the service. The company, which expects to add just over half a million net subscribers in the next quarter before the increase takes effect, faces increased competition from a wide variety of online video services from Amazon, Apple, Comcast, Google, Hulu, etc.

Discussion Questions:

What do you think of Netflix's plan to raise subscription prices for new members while grandfathering the current price for existing members? How do you expect Netflix's video streaming rivals to respond?

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Instant Poll:

Will Netflix's plan to raise subscription prices for new members while grandfathering the current price for existing members help or hurt its total membership numbers?

Comments:

The price increase for new members is the "canary in the coal mine" for Netflix. They should be able to measure price resistance at $8.99 or $9.99 per month, in order to decide when and how fast to raise subscription rates on existing members. It's only a matter of time.

It's hard for Netflix to maintain pricing while committing to improving the product. Netflix needs to pay carriers like Comcast for higher speeds, it wants to develop more original programming, and it needs to make its movie catalog more competitive with Amazon and Apple. (Right now, the movie selection is awful.) The only realistic way to do this, and to maintain margins, is to raise prices in increments.

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Dick Seesel, Principal, Retailing In Focus LLC

As noted in the article $1 or $2 a month won't slow new subscribers. Frankly, as I'm sure many will comment, it's a nice change from seeing "the new people" get a better subscription price than legacy members as usually happens. In this case it makes 48 million of us feel appreciated and glad we were already signed up. Doesn't take much, does it?

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Ian Percy, President, The Ian Percy Corporation

That's fine as they are rewarding their existing members for now, but could see that changing at some point as well. And if they raise their prices by $1/month that amounts to $12/year so hard to see someone saying no to that because of the actual expense.

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Bill Davis, Director, MB&G Consulting

Netflix is super smart to raise prices for new customers only. At a minimum, as the article notes, it's highly unusual for companies to adopt a more favorable pricing structure for existing customers and these existing subscribers will appreciate Netflix for that. It also sends a message to prospective subscribers that they will matter when they become customers, further supporting the relative premium they will pay. Finally, as Netflix wrestles with cable companies and other broadband providers, it further differentiates itself as being more customer centric than the competitors. While not a high bar to clear, it's a stark contrast.

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Phil Rubin, CEO, rDialogue

It's nice that loyal customers are being rewarded for their past business, versus paying more than new customers who get better pricing plans than longtime loyal customers.

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Shep Hyken, Chief Amazement Officer, Shepard Presentations, LLC

Somebody finally got it right. Take care of the customers who got you there.
The main reason I left my last cable company is my price kept going up while new buyers were always getting better deals.

I think competition is going to have a tough time winning against this strategy.

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Mel Kleiman, President, Humetrics

I was an early fan of Netflix and their amazing innovation, from recommendation engines to pushing forward the viability of streaming media, on-demand viewing and all-you-can-eat programming via subscription. They also learned some great lessons along the way, including their very wise about-face on proprietary hardware when they jettisoned Roku and focused on getting their app on as many devices as possible. Brilliantly done.

However, the gathering storm seems to me to portend some darker days ahead.

1. Their foray into original programming is a double-edged sword. It provides them with some popular hits that are exclusive to their network. But these are fleeting in nature and hard to replicate frequently enough to be a sustaining differentiator that locks in subscribers long term. Hence one of the reasons for price hikes for new subscribers. If new subs sign up to binge watch House of Cards, then cancel their subscriptions, Netflix probably figures they should at least get a few more bucks while they can. This can tend to create spikier revenue as they go through more chaotic subscriber churn, and Wall Street may have some issues with that.

2. Netflix creating their own content can create a threatening or combative relationship with studios, who are vital to Netflix in keeping a flow of deep catalog of popular content. This can result in higher content acquisition costs, and hence higher subscription prices.

3. Other distribution platforms aren't sitting on the sidelines. Amazon represents, in my opinion, the most daunting threat to Netflix.

We'll see....

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Matt Schmitt, President, Chief Strategy & Innovation Officer, Reflect

Given the negative publicity with Netflix's last moves, their decision to grandfather current subscribers will be welcomed. Recognizing that they need more money for their new business model means they have to raise money somehow.

In terms of what streaming rivals will do, it depends upon their business plans. Netflix says it needs money to fund original programming. If that is their business model, then rivals who are also involved in original programming may need to generate more money as well.

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Camille P. Schuster, Ph.D., President, Global Collaborations, Inc.

Sure, we can all talk about this from the "Inside baseball" approach, but consider it from the customer's point of view. If you have ever been a customer of Comcast or the likes of Comcast, you could be inspired by an alternative that actually respects their existing customer base and understands the importance of its retention.

In fact, as a customer, you just may be delighted and induced to be loyal as other alternatives enter the market and change the entire dynamic of how media and entertainment enters the home.

The "New" customer will consider the Netflix price at the time they enter the market and will consider that against the competitors and alternatives at the time they choose to purhase/subscribe. They will, like with any other product, have little interest whatsoever in what another customer is paying. They will consider their own wallet.

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I am impressed that finally loyalty is being acknowledged and rewarded. Good for Netflix. Sure wished I had joined sooner.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

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