Netflix Taking Heat Over Price Increase
It’s normal for grumbling to take place when the price of a product or service goes up. However, the displeasure being expressed by consumers about a 60 percent price increase from Netflix goes well beyond grumbling.
The video rental service announced it was ending its $9.99 monthly plan that allowed subscribers to watch an unlimited number of titles online while renting one DVD through the mail. Beginning in September, consumers who want the same deal will have to pay $7.99 for instant streaming and $7.99 to receive rental disks delivered to their homes ($15.98 total).
A Los Angeles Times article citing Tony Wible, an analyst at Janney Capital Markets, as its source estimates that roughly 80 percent of Netflix customers are expected to be affected by the change.
Phone lines to the company were reportedly jammed as angry customers waited to vent. According to several reports, one firm, BTIG Research, placed 35 calls to Netflix yesterday and only got through 15 times after waits of between nine and 15 minutes.
As of 7:31 a.m. EST today, the Netflix Facebook page had 55,843 comments. Most were overwhelmingly negative. Here are a few quotes that didn’t include expletives directed at the company.
- "If you’re unhappy about this cancel your account. You can always go back later if you choose to. It is the only thing that will get through to them. No amount of Facebook protest groups or angry emails will work. They are all about the money. So hit em where it hurts!"
- "Check out the free trials at Hulu and Blockbuster."
- "Call me gone… Long live RedBox."
- "Netflix needs to explain why a 60 percent increase was necessary after raising their rates just a few short months ago! The streaming is old stuff. DVDs can be rented for a buck at RedBox. Bye Bye Netflix, you cut your own throat just like Blockbuster did."
Steve Swasey, Â a spokesperson for Netflix, said the company anticipated negative reactions to its move.
"We tested, we researched, we analyzed," he told CNET. "We knew what the reaction would be. We are not surprised. We knew that there would be some people upset by the service and with the price being adjusted."
Some people? Really? Mr. Swasey and others at Netflix might want to check Facebook.
- Netflix – Facebook
- Netflix raising prices as much as 60% – Los Angeles Times
- Netflix Phones Ringing Off the Hook in Response to Price Hike – The Hollywood Reporter
- Netflix Customers Jam Phones Over Price Increase, Analyst Greenfield Says – Bloomberg News
- Netflix price rise draws user ire, investor glee – Reuters
- Netflix managers anticipated angry reaction – CNET News
Discussion Questions
Discussion Questions: What do you expect to be the fallout from the Netflix price increase? How would you respond from this point forward if you were Netflix?
The biggest issue with the Netflix move is the lack of any offsetting strategy to improve its service levels as the company migrates from DVD rentals to live streaming.
As a longtime subscriber, I’ve noted two big problems: The delays in release dates compared to pay-per-view operators, and the amazingly thin selection of live-streaming movies. The price increase may be intended to turn the DVD rental business into a “cash cow” that can help solve the streaming-assortment issue, but Netflix also loses its competitive-pricing edge vs. Amazon, iTunes and local cable operators by jacking up its fees.
If Netflix isn’t careful, it can turn quickly from a well-respected e-commerce innovator into an online Blockbuster. Only “best in class” service is going to placate longtime subscribers.
Finally there is some justice in the world. In recent years, those of us who are premium Netflix customers, with rental plans for 6 or more DVDs have seen our monthly bills rise to subsidize the one DVD subscriber.
Now Netflix has finally realized that it needs to charge separately for streaming. It’s a long time coming. So for those of us who rent 6 or more DVDs at a time, we will actually see our monthly bills lowered by less than a dollar, but hey, justice is finally served.
I think they’re in a tough spot with studios increasing licensing costs. I’ve been disappointed with their lack of selection for streaming, and they don’t seem to be increasing that selection very fast. From friends I’ve talked to and what I’ve seen online, RedBox should expect a surge in new customers, myself included. With competition increasing, now was not the time to raise prices.
They didn’t do this in a vacuum. No way of knowing who is flaming are actual customers, etc. Bravo they didn’t just fold–the goal is to be profitable in business.
In terms of fallout, 55,000+ comments on Facebook says quite a lot! While Netflix modeled this move, as they say, it’s unlikely the modeled this many comments on Facebook and the impact it will have. They might change course but then again, they very well might not.
A 60% price increase will make up for a lot of churn, even while there are plenty of competitors who will pounce on this. Those in the content distribution business (e.g., especially cable companies) are not the best marketers out there!
More importantly, Netflix has one great thing going for it, and it’s quite likely under-appreciated by most people doing analysis: inertia.
Inertia in a subscription business like Netflix is often the best loyalty strategy. Habit is a very strong behavior attribute to break and it’s very applicable here. It will be interesting to see which is stronger, habit/inertia or price elasticity!
While Netflix is entrenched enough to weather consumer discontent,this could be a boon for Blockbuster’s on demand service, as well as for cable on demand services and also online platforms like Hulu. Netflix is assuming its dominant position cannot be challenged, but the e-commerce space is still a very unsettled frontier.
As a consumer, I think it’s crazy to pay for movies. The library and YouTube has it all for free. Netflix can do what they want. I’m sure they weighed their options. Raise prices, lose a few customers. If the overall effect is more revenue, it’s a good move.
I expect the short-term fallout to be a lot of Netflix bashing on social media, and in the “mainstream media.” The long-term fallout will be increased profit. The reality is that corporations are all about making as much revenue and profit as possible. This isn’t right or wrong, it’s just reality. There are companies that do go above and beyond in terms of PR and trying to “do the right thing” and Netflix apparently isn’t one of them.
Does it matter? Probably not. But, it does aggravate consumers when companies act in an arrogant way like this by raising prices when they know their customers are struggling. On the other end of the spectrum, Estee Lauder just announced a price increase and one of their top execs noted that they were doing it not because they needed to, but because they ‘can’.
This kind of stuff just reinforces the notion that companies are really in it for the money, kind of the way we get continual reinforcement that pro ball players aren’t really in it for the fun, but for the bucks, as if we didn’t know. Just makes everyone a little more cynical over time.
I expect they will lose some customers, but that most of them will return at some point. Blockbuster is roughly the same price and RedBox, offers a limited assortment and is not as convenient. Who knows what Hulu will offer?
Netflix had to raise prices to afford the demands being made upon it by the studios, particularly regarding the availability of films for its streaming service. That service does not offer many current films or TV shows, and would have continued down that path without paying more money to the studios.
Netflix should have done a better job of explaining the need for a price increase. A thorough explanation, along with a reward for continued consumer loyalty would have gone a long way towards dampening consumer anger.
I long ago quit with Netflix’s mail program. This happened about 1 week after the first Redbox showed up in my neighborhood (there are now 4 locations, each less than a mile away). I still love the streaming which Netflix manages to do remarkably well over an old wireless G router.
Long term, Netflix will catch more hell for not rotating movies faster into the streaming queue than increasing the cost of its one-at-a-time mail service. This business is evolving rapidly; very rapidly. I personally look for the streaming market to move offshore where “distribution agreements” don’t apply–or can’t be enforced. I currently download my music from Russia at 9 cents a song vs 99 cents in the USA. Soon they will be able to stream first-run movies within a week of its release for under one dollar! Want to get even with Netflix? Just wait, their business cycle is almost over. They will have to find a way to adapt or they will be gone in two years. I must say that it looks like they hired a few executives from Blockbuster. It would have taken someone with less experience years to find a way to alienate their customer base like this. Or maybe they got an executive from Delta Airlines!
The fact that Netflix created an option for subscribers is not surprising as some people surely are satisfied with a streaming account only, while others need or want the physical DVD to be shipped.
The physical exchange of DVDs was their original model after all and it will be tough to wean people from this option. Maybe in another 10 years, we’ll all be “stream only” movie-watchers.
The timing of the announcement is the surprise. It has just been in the past 12 months that Netflix seemed to have finally captured a market leading position, with the demise of Blockbuster physical locations there is less choice in the market.
Given that fact, changing the plan to “accommodate” customers can be seen as taking advantage of a consolidated market position, hence the negative feedback.
Truth of the matter is that Netflix is still a good deal if the subscriber is even a bi-monthly movie watcher in theaters. That is almost the competitive play at work here. Spend $20 plus food to see a newly released film in theater or wait a bit and watch as a movie every weekend for $15/month.
That match might survive once the furor dies down.
“However, the displeasure being expressed by consumers about a 60 percent price increase from Netflix goes well beyond grumbling.”
Really? Isn’t that exactly what phoning in a complaint or posting on Facebook constitutes? Sorry, I don’t consider 55K complaints out of more than 23 million subscribers–yes, that’s 2/10%–to mean very much: even if every one of them leaves and takes 100 people with them, it sounds like the revenue effect is still positive.
Netflix has a real problem. Visual content will soon all be digitized and should, in theory, be even cheaper to deliver. I’m thinking enough Netflix customers have figured this out. The company seems to be forcing everyone over to streaming video but not really rewarding them for the shift.
Short-term impact–they are going to see some significant, but far from fatal, fallout. Long-term, my bet is they will be fine and people will pay.
Our extended family uses a Netflix program for 8 titles out at a time plus the streaming function. It was $55 and change monthly. Now that they’ve split the two services and priced them separately, our monthly charge is $53 and change. We save $2 a month. Clearly, part of the Netflix strategy is to move customers into multiple disc programs. The larger your program, the less difference between the old price and the new price–until in our particular case we actually enjoyed a cost reduction. And, we don’t stream that much which, if we cancelled that portion, would reduce our monthly cost to about $45. We’d save $10 per month.
Netflix has long been a leader in utilizing advanced analytic methods and tools to predict customer behavior and buying patterns. Their quants have probably been able to determine how this decision will ultimately affect their business and determined the price change gets them to their business goals. From the outside this looks as though they are utilizing the same price optimization technologies that leading retailers are using in stores today. See the book “Competing on Analytics” for more detail on how Netflix uses analytics to drive business decisions.
My wife already dropped the mail-in service due to increases. The jig is up, and here come the huge price increases as consumer demand increases. If cable is smart (duh), they would offer their new releases on-demand for $9.95 month unlimited, and netflix would be hurt severely. The consumer always wins…except with utilities and gas prices….
Tony Orlando is right; if the cable companies offered unlimited movies for $9.95 a month, they could shut Redbox and Netflix down. Personally, I don’t think they have the bandwidth to support the volume. If they have the bandwidth and aren’t ramping up to do this then they are [crazy], but then they are “cable” companies! What can I say?
Although the increase may make sense to Netflix because it wants to get out of the DVD business, it doesn’t make sense to most consumers who used the DVD service. They have angered a loyal customer base. Time will tell how much damage has been done.