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Netflix Price Increase – good business sense or a boondoggle?

Netflix Price Increase – good business sense or a boondoggle?

Recently Netflix raised it prices 60% for many of their subscribers. While I do not have insight into their financial model or how that will impact profitability, I think the price increase was a mistake for the following reasons:

Loss of key customers – Netflix gained the loyalty of the early adopters and managed to maintain it via their large selection and low prices.  These early adopters helped spread the word and the base grew to the early majority, then hit an inflection point in 2009 and swept up the late majority.  Now, their once loyal base is upset and looking at other alternatives, particularly those early adopters.  Strong Netflix fans and rabid promoters have reduced their subscriptions and/or left Netflix.  The loss of the core base will undermine Netflix in the long-term because they’ll find the next big thing and pull the early and late majority with them.  As a subscriber, we immediately downgraded our monthly expense from $12.99/mo to $7.99.  Roger Ebert tweeted that he immediately downgraded to $7.99.  I suspect many subscribers took the same action.<

Significant drop of Netflix (NFLX) share price – Touted as the next Dell, Netflix had a bright future.  However, with the price increase, their value plunged because their customer base was fleeing to other alternatives.  I sold my Netflix stock at $292/share.  Glad I did as the current price is $225.54.  Netflix will probably recover, but they’ll have to get back in the innovation game pretty quick, or they’ll head right down the Blockbuster path to Blockbusted.

Loss of cool factor – Though the price increase irritated customers, the real cause of the loss was the poor treatment of customers.  With no explanation about the increase, CEO Reed Hastings was dubbed “Greed Hastings”.  His cavalier response to industry analysts about the complaints or “noise level” speaks volumes when he said, “Believe it or not, the noise level was actually less than we expected, given a 60 percent price increase for some subscribers.  We knew what we were getting into.”  For many, Netflix has lost its “cool” factor.  That intangible value has to be worth something that is not found on their income statement.

To be successful, know your profit-levers in both the short and long-term.  The price increase will likely boost profits in the near future, but long-term, Netflix may have opened Pandora’s box.

  • To be successful, know your profit-levers in both the short and long-term.  The price increase will likely boost profits in the near future, but long-term, Netflix may have opened Pandora’s box.