With a market cap of over $15bn and a share price of $290, Netflix is one of the internet's highest flying stars. But changes the company is making to its pricing could have it crashing back down to earth.
Yesterday, the company announced that it is offering two separate plans going forward: one for unlimited DVDs by mail, which costs $7.99/month, and one for streaming, which also costs $7.99/month. Currently, Netflix customers can receive both unlimited DVDs and streaming for only $9.99/month.
Not surprisingly, a 60% price increase has sparked an online fury, with angry Netflix customers threatening to drop their Netflix subscriptions.
How did Netflix, a company which seemed like it could do no wrong, find itself in such a tough position?
It made a bad assumption: it overestimated how quickly consumers are ready to phase out the DVD.
So in making DVDs by mail a $2 add-on to a $7.99/month unlimited streaming plan, it underestimated the financial liability it was creating for itself. The company's new pricing aims to right its wrong, but at the expense of consumers who were getting a deal they thought was fair.
At the end of the day, Netflix is making the same mistake many publishers are: it's hoping to charge consumers by the channel. Want to watch movies on DVD? You have to pay for that. Want to stream movies over the internet? You have to pay for that separately.
Financially, Neflix may be doing what's sensible, but the proposition, which forces consumers to choose between delivery methods, is understandably leaving many consumers disappointed.
One of the big problems is that Netflix offers a huge library of DVDs, but its streaming library leaves a lot to be desired. In charging $7.99/month for DVDs and $7.99/month for streaming, it is trying to pretend that both offerings supply equal value when a meaningful number of customers seem to be saying just the opposite.
So what should Netflix do?
For starters, it should immediately introduce a discounted bundle deal. Customers feel they're getting the short end of the stick with Netflix's new pricing, and if the company wants to minimize the risk of significant attrition in the near future, it would be wise to offer a discount of some sort to customers who purchase both the DVD by mail and streaming bundle.
Second, Netflix needs to get its head around the fact that customers don't want to be penalized for the convenience of using different channels for delivery.
Instead of separating DVDs and streaming into two packages, the company needs to find a way to make its service financially viable without forcing consumers to pick a delivery channel or pay a penalty.
If this genuinely requires a significant increase in price, it would appear that Netflix will need to significantly improve the selection of its streaming library to have a shot at convincing customers that they're still getting a great value regardless of the increase.
For companies grappling with the challenges around multichannel service and delivery, Netflix's pricing fiasco offers a few lessons:
- It's great to think about how channels will evolve in the future, but basing present-day decisions on future expectations around customer preferences is a recipe for disaster.
- Raising prices is usually difficult for obvious reasons.
- It's best not to tie pricing to channels if you can avoid it.
- If you can't avoid charging in a channel-specific fashion, understanding the perceived value of your offering in each channel is crucial if you want to avoid mispricing.