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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.
Patricio Robles

Published 13 July, 2011 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2380 more posts from this author

Comments (6)

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Tristan Cordier

My experience has been that the people who squabble over $6/month are the marginal users of the service, which means that they would have canceled anyway when something slightly more convenient came along. You know that Netflix performed market research and did the proper calculus before rolling this out. The backlash is only magnified because of whiney social media users who can't understand that Netflix's pricing for a month of streaming and DVDs is still competitive with one movie theatre ticket.

about 5 years ago

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Al Knobel

What you don't seem to grasp from this is the fact that the subscription price is now $15.98 plus tax and from a price of $9.99 + tax. It is not the money it is the principle of a more than 60% increase. It is a huge smack in the face to a loyal following of subscribers who made the company successful. Lets face it these are the same customers who about a year ago received a 15% price increase. My orig plan for this service was $8.49 + tax. Enough is enough !!!!

about 5 years ago

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ecommerce website

I'm sure they did their homework but obviously got it wrong. I dont completely believe people paying the traditional low entry package of $6/month are the marginal users of the service. I bet collectively they make up the majority and with every economic micro or macro analysis the majority are usually the smaller players or in this case the punters of the service.or the backbone for revenue. Putting together a discounted package for the dual service will go a long way to appease their customers as they wil probably see from their NPS scores with full data from this issue.

about 5 years ago

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Amanda

The mistake Netflix made was in charging the same price for streaming as they did for DVD. The company seems to have forgotten that its current streaming library sorely lacks in content and only serves to pacify the customer as they wait on their DVD to come in the mail. As a good source of home entertainment, their streaming library does not stand on its own.

about 5 years ago

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Miguel Rosario

I think the question to ask is what's the offering here? I am one of those loyal customes who will see their price plans increase in September. Though I've grown fond of their streaming service it has proven to be a stressful experience to use. Firtsly, as you mention in your post, the selection of digital movies is not that comprehensive, the physical DVD catalog is much more attractive. Secondly, I can't understand why if a movie is available as streaming it does not have a preview available. At least 40% of their digital movies do not have this option (which I find it to be such a frustrating contradiction!), forcing me to search elsewhere in order to find out if a movie is worth the shot for instant viewing. This, together with the low quality of their streaming is not worth for me switching to an streaming-only plan. I was willing to overlook these limitations simply because their streaming experience is in real need of an overhaul and I had hopes that it would become much more than just an nice-to-have addon service. But... they have failed to impress me after 7 years of membership.

about 5 years ago

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GrumpySEO

$7.99 a month for unlimited DVDs ? All I can say is WOW ! The sooner Netflix comes to the UK, the better. We are getting mugged by the likes of Lovefilm who want £10 per month just for the basic package (only 1 DVD at a time).
Anyone know if Netflix are planning on launching in the UK?

about 5 years ago

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