In this article, the author explores the revenue management case study of Netflix, and presents how the company was able to issue a 17% price increase within 18 months and still grow subscriptions and top line revenues. Marc Carias is Consultant at Revenue Management Labs, a consultancy which helps clients solve problems around Pricing, Discounts, Product and Channel strategies. Carias is a revenue management professional with more than five years of experience in the aviation and healthcare sectors. He can be reached at mcarias@revenueml.com.

The Pricing Advisor, December 2021

Throughout 2013 Netflix saw significant issues with their domestic streaming service, including:

• Increased Competition – Hulu and Amazon had begun to gain market share and offer differentiated services.
• High Content Costs – Consumers in video streaming want content, and lots of it. Content can retain customers and differentiate service. The problem is that content is expensive, and in 2013 content costs were more than 50% of streaming revenue for Netflix.
• Average Price Decreasing – In 2013, Netflix began offering a premium or family service for $11.99 ($4 more than their standard service). Consumers were not attracted to the premium service and opted for the standard service instead as the average price per user began to quickly decrease to $7.74 from a peak of $7.81 shortly after the service was introduced. This represents a $20M decrease annual revenue.
• Slowing Growth in Subscriptions (Volume) – Quarter over quarter growth subscription had plateaued.

To grow profitability Netflix had to cut costs or increase their top line. To retain customers Netflix had to invest in content. The only card Netflix had to grow profitably was to increase their price, a risky move given the circumstances.

Figure 1: Netflix’s implementation increasing their domestic standard price, i) two instances of $1 increase and ii) followed by two “un-grandfathering” periods.

Netflix used two revenue management techniques to increase price:

• More Tiers – Netflix took a page from Airlines and offered a “No Frills” tier. This allowed customers to segment themselves and pick the offer they wanted. The majority opted for the increase in price since the value offering matched their willingness to pay.
• Phased Approach – Netflix used different phases for current and new subscriptions:
  • Current – Netflix introduced a “grandfathered” system where current users’ price increases would be delayed. This was meant to create and sustain loyalty. The decision also gave current customers time to become accustomed to the new tiered product offering before having to pay more.
  • New – Instead of a one-time increase, Netflix opted for two smaller one-dollar price increases. This had two positive effects:
    • i) One dollar seemed marginal to customers, meaning they would be more likely to accept the increase
    • ii) Small increments allowed Netflix to gauge and monitor reaction to their price increase

Throughout implementation, from May 2014 to October 2016, the average price increased by 17% or $1.39 per user. The results of the increase became very visible in the fourth quarter of 2016 where revenue growth hit a three-year high. Price increases allowed Netflix to increase domestic annual revenue by $800M or 44% of their domestic margin.

Figure 2: Results of Netflix’s domestic standard price increase

Netflix’s price increase was undoubtedly a success. However, did they leave money on the table? There are a handful of additional revenue opportunities that were overlooked:

• Continued Tier Differentiation: Currently, the value propositions between the three tiers are minimal. Netflix could add more features to the premium offering (i.e. current weekly content) or add revenue generating activities (advertisements) to the basic package to motivate upselling.
• Add-ons: If customers are not inclined to take the leap to the next tier, add-ons allow customers to choose upgrades on an ad hoc basis. For Netflix, this could entail having add-ons to each of the tiers (e.g. add a screen or increase stream quality for one dollar). This must be done carefully as to not cannibalize current offerings (i.e. maximum number of users).
• Mix: This involves understanding how the Netflix offerings interact with one another and how that impacts the bottom line. Netflix can focus on moving users “up the premium ladder” into higher margin offerings by offering free tier upgrades for a limited time.

Although many people despise Netflix for their price increases over the past few years, only three percent of customers canceled their subscription, and many of them came back! The fact that a company can issue a 17% price increase within 18 months and still grow subscriptions and top line is what revenue management is all about. There is a very good possibly that Netflix is aware of the money left on the table and have decided against capturing it until their next price increase. Watch out!