Netflix Pricing Strategies

Question

Hi Guys,

I want to ask your opinion regarding the Netflix pricing strategies.

So the case is:

Netflix is contemplating to acquire new business model, which is a paid per film (so basically the customer paid for the film that they rent). How did you determine the prices?
The information that I got is

a) The total subscriber right now is 1M, whereby 400k are movie enthusiast (watch 12 films per month), 400k are on a family plan (watch 8 films/month) and 200k are casual users (1 film per month)

b) The price for regular are 120k per month, and the price for the family plan is 168k per month for 4 people

My approach are

a) I benchmarked the prices from the movie enthusiast (So I divided 120k to 12films, which is they willing to pay around 10k per film)

b) I put external factor to be considerate, I assume that if we buy some Blue Ray DVD is around 50k per film, which we got the film and the ownership of the film (physical CD), and it important for movie enthusiast, so the range price per film should be around 10k-50k per film.

Does it make any sense? Looking back for all the feedback!

(The initial case is profitability case, whereby the outcomes are shifting to the pricing, and I think I need some feedback regarding the pricing)

Cheers,

A

Answer 1

Hi there,

I would take these factors into consideration:

After shifting to the pricing per movie, the sales and marketing cost will increase, because now we are not seling a package, but single movies, hence single movies need to be promoted.
When we have a package, there is a tendency to binge watching, so you end up watching movies that you not necesserily like. With per movie pricing, the customer will be more cautious, and probaby the consumption of movies will reduce.
DVD-player and similar will come in much more closer competition. A DVD you buy and you can keep it whereas a movie on Netflix you can't possess. So you'll have to compete in price with DVDs.

Factors 1&2 will increase the price, but at the same time your price should be lower than your competitor's from factor 3.

Hope it was helpful,

Cheers,

GB

Answer 2

Sorry, I'm a bit confused here. You're saying to charge a family $168,000 per month? Or $168?

Now, in terms of pricing, remember that you have the option to do value-based, benchmarking, or cost-based (in that order of preference).

Question #1: Are there competitors (or is this a new market)?

Q1A: If yes, can I differentiate my product?

If yes, value-based

If no, competitor pricing/benchmarking is eliminated.

Q1B: If no, can I determine the value-add of my product (i.e. if saves x costs or a survey says people will pay x)?

If yes, value-based

If no, cost-based

Summary: If you can, you always want to do value-based. This is the most effective form of pricing. If you have "something" to go off of, you use it, else you use cost-based because you have no other choice.

Value-based occurs if:

1) You are a monopoly

2) You are the first entrant into a market

3) You can differentiate your product from other (I.e. monopolistic competition)

Answer 3

Hey,

For pricing strategy, you have following options:

Price above competiion
Price at par
Price below
Hybrid- rather than one size fits all, charge differential pricing based on customer segment

One way you can approach is to prove/disprove the options above & settle on the right pricing strategy. You can drill down to understand:

Current revenue
Costs (fixed/variable)
Services offered in the package
Competitive advantage

Hope this helps.

Answer 4

Hello!

To add on top of what has been said so far and not repeat: you are right, but you are only focusing on the more econ and qualitative part of the problem. What about social and operational aspects? What about risks? Mainly, everything that goes beyond economics.

Best,

Clara