University of Business and Technology Netflix Price Increase Case Study

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Netflix Price Increase Hurts Membership
Netflix experienced some membership turbulence in 2016 as a price increase was phased in for its US subscribers.
In May 2014, Netflix announced that the price of its standard subscription service would increase from $8 to $9.
However, established customers were allowed to stay at the $7.99 price for two years. In 2015, Netflix increased
the standard price to $9.99. As a result of the pricing plan and the deferred price increase, in May, 2016, the
standard pricing plan for long time customers of Netflix increased from $7.99 per month to $9.99 per month.
Netflix began notifying customers in April that the price increase would become effective in the second quarter.
Netflix was trying to implement price increases more slowly after a 2011 increase led to negative publicity and a
customer backlash. In that case, Netflix separated its streaming and DVD services, and charged separately for
both services.
However, regardless of the implementation of the price increase, the higher monthly prices seem to have impacted
the growth of membership among US subscribers. In the two quarters before the price increase, Netflix added net
membership of 1.6 million and 2.2 million members. By contrast, the number of members added in Q2 was only
160,000, and in Q3 only 400,000. The Q2 growth in US subscribers was the lowest since Netflix began reporting
those numbers in 2012.
US Streaming (millions)
Revenue
Contribution Profit
Contribution Margin
Paid Memberships
Total Memberships
Net Additions
Monthly Revenue per
Paid Member
Percentage Chg. Rev
Percentage Chg.
Memberships
Q2 2015
1026
340
33.1%
41.1
42.3
0.90
$
8.33
Q3 2015
1064
344
32.3%
42.1
43.2
0.88
$
8.43
3.7%
Q4 2015
1106
379
34.3%
43.4
44.7
1.56
$
8.49
3.9%
2.5%
3.2%
Q1 2016
1161
413
35.6%
45.7
47.0
2.23
$
8.47
5.0%
5.3%
Q2 2016
1208
414
34.3%
46.0
47.1
0.16
$
8.75
4.0%
Q3 2016
1304
475
36.4%
46.5
47.5
0.40
$
0.6%
Source: Netflix 10Q Q3, 2016
1
9.40
7.9%
0.9%
According to a MarketWatch article1 on the price increase:
Netflix said Monday that customers who learned in April that the price was about to increase had begun
canceling their subscriptions, leading to unexpected “churn.” Netflix did not flat-out say in its letter to
investors that the price increase led to higher churn among subscribers, however, instead saying it
coincided with “press coverage” of the rate hike and that subscribers misunderstood “the news as an
impending new price increase rather than the completion of two years of grandfathering.”
The stock market reacted to news of Netflix price increase as well. The stock closed at $102.23 as of March 31,
2016. After the release of second quarter earnings in July, the stock price had fallen to $85.84 per share, a decline
of 16%. This decline wiped out almost $7 billion of shareholder value during this period. Most of this decline
was immediately following the release of the second quarter numbers.
With competition increasing in for streaming services, especially with the growth of Amazon Prime Video and
Hulu, the decline in membership growth could be a troubling sign.
The Questions:
•
Can we use the information in the case to estimate the elasticity of demand for Netflix subscription services?
•
Now, can we calculate an own-price elasticity of demand?
•
Are there other concerns with our elasticity estimates?
•
What could make this analysis better?
•
What do we expect to happen to Netflix’s revenue due to the price increase?
•
What do we expect to happen to Netflix’s profit due to the price increase?
•
Given this analysis, why did Netflix stock get hammered after releasing results?
‘Netflix price increase does damage, but media and subscribers blamed’ Jeremy C. Owens, Marketwatch.com, July 19, 2016.
http://www.marketwatch.com/story/netflix-price-increases-causing-subscribers-to-sign-off-2016-07-18
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Hurts Membership

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