Price Checks

Netflix Customers Get Ready, Higher Prices Are Coming


Netflix Customers Get Ready, Higher Prices Are Coming

Photograph by Elise Amendola/AP Photo

Three years after Netflix (NFLX) increased its prices and sparked a painful backlash that savaged its share price, executives at the online-video service are once again testing various prices and streaming combinations beyond $7.99 per month for new members.

Last spring, Netflix (NFLX) started an option aimed at families to allow four simultaneous streams for $11.99 per month, and the company has been testing different prices for standard resolution, high definition, and concurrent streaming options. In December, the company began a $6.99 monthly plan that allows streaming to only one screen, and executives spoke of their efforts to find a three-tier “good, better, best” pricing plan.

“It’s not clear that one price fits all,” Netflix Chief Executive Officer Reed Hastings said on Wednesday during the company’s quarterly earnings chat, which it streams on YouTube (GOOG), declining to discuss “the dozen type of things” Netflix could do to segment its offerings. “The trick is not having too many factors, keeping it understandable—and really, that it feels fair and resonates with consumers.”

Earlier this month, Netflix raised its streaming price in Ireland for new customers by one euro, to €7.99 ($10.94) per month, and gave existing members a 24-month grace period before the higher price hits. Should Netflix decide to charge more in the U.S., it’s likely that the company will offer a similarly lengthy extension to help quell member whining in its largest market. Such “generous grandfathering” for existing members, as Netflix put it, would also delay much of the financial benefit for the company.

“We are in no rush to implement such new member plans and are still researching the best way to proceed,” Netflix wrote in its quarterly shareholder letter (PDF).

Over time, a pricing strategy without different tiers can curb a company’s financial upside, which is why most merchants have landed on a model geared toward selling products and services at budget, middle, and upscale levels. Restaurants typically find that their least- and most-expensive wines are vastly outsold by the middle-tier offerings—no one wants to appear a cheapskate or foolish spendthrift.

“In pricing theory, there’s always a sense that consumers make choices around heuristics,” said Netflix’s chief financial officer, David Wells. “So $1 might not sound like a lot on a logical basis, but customers may have shortcuts that they take in the middle or the upper or the low.”

At Netflix, for several years, that kind of merchandising has been absent. The company has left its simple $7.99 monthly charge alone for most customers, even while its international ambitions and original content costs have expanded dramatically. It’s high time for some additional prices.

Bachman is an associate editor for Businessweek.com.

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Companies Mentioned

  • NFLX
    (Netflix Inc)
    • $421.86 USD
    • -3.52
    • -0.83%
  • GOOG
    (Google Inc)
    • $589.02 USD
    • -4.33
    • -0.74%
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