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How should Netflix have positioned their price hike and why did they do it the way they did?
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3 Answers
Netflix is in trouble. Their Starz deal, which I believe provides most of their DVD catalog, costs them $30 million per year. I believe that deal expires next year, and Hollywood is looking for Netflix to renew at $200 million per year, for what will likely be a smaller catalog of content.
So as a result you hear Netflix say "we're getting out of movie distribution and want to be more of a content creation company". Good luck with that. That line of work isn't so easy. Or cheap.
Given as how Netflix's Net Income was $161 million last year, an increase of costs of $170 million per year is not going to do much for their financials.
So while they may have bungled their fee increase, it had to happen at some point soon no matter what clever messaging they put around it.
This is a very big pair of questions, and probably should start with "Why did they make such a dramatic price increase all at once?" You can't position the unpositionable.
I just chalk it up to hubris, really.
I suppose the first step would have been to improve the streaming offering (I'm a Netflix streaming customer - apart from the documentaries, the selection is really poor). Then create a tiered pricing program, and FINALLY after all that, do what they did right out of the gate.
My RSR partner Nikki Baird just wrote a piece coming out today called "How NOT to Raise Prices" and goes through the details of what they did wrong, step by step.
It.was.bad.
Their goal is to shift people to streaming but a wiser path would have been to grandfather their existing customers at least until streaming content could be improved and then gradually transition them into a split plan with no more than a 10% increase at any given point in time. The way they did it put their most profitable customers at risk, those that were paying but not really using the service, as these folks are likely to leave or change to lower cost (less profitable) offering that better fits their needs.
Whoever made this decision was likely new to pricing and this may go down in the books as one of the most expensive pricing lessons ever.
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