PRICING FAILURE FOR NETFLIX

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Back in July 2011, Netflix had a customer base that was willing to pay the $10 per month for a subscription fee even if they barely used the services simply for the convenience.What Netflix did to compromise this relationship was to create a 60 percent price hike on its service (the price rising from $10 to $16 per month). Customers were then given the choice to pay $8 per month for the streaming service, $8 per month for the DVD renting service or $16 per month for both.

Netflix made a mistake in misjudging its customers, so when it changed the price structure, it changed people’s perception of the product that they were happily paying for a month by month without question and sometimes without use. These customers showed themselves to be price sensitive on the service that was being offered. The higher price would likely bring higher expectations however if a customer chose one of the $8 options Netflix was primarily halving the product that it was offering and still charging 80percent of the original price to that customer. Alternatively, for customers to keep the product that they were originally receiving they were going to experience a 60percent increase in their fees. Couple this with the fact that Netflix makes this announcement on the back not being able to renew its streaming deal with Starz Entertainment; a valuable source for new movie content. Causing a perception from customers of a decrease in quality.As a result of this price hike Netflix lost over 1 million more customers than it had anticipated, this, in turn, caused the stock prices drop 75 percent.

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Of cause, the damage was temporary. The following year, Netflix delivered a 1,100% return. The company quickly got back to the business of winning, with more new subscribers than it had previously lost due to their failed pricing decision, a decision which they learnt a valuable lesson with Netflix not increasing their price again until 2014 two years later. This time, Netflix took a few survey that found only 3 percent of subscribers would quit the service if the price increase by $1 but they offered to be grandfathered in at the lower price.

Netflix was offering a range of potential prices, which raised customer’s expectations, and grandfathered in current customers at the lower rate for two years. Companies cannot avoid price rising but with implementing careful strategy, this can be achieved without major impact.

Do you know any examples of price sensitive customer for a particular business? If this business did make a similar mistake to Netflix’s would it also be able to recover?

Auchara Chuamuangphan ID: 213581898

achuamua@deakin.edu.au

 References

Anders B, 2015,”Netflix prices will never skyrocket again”, retrieved 29 April 2016.<http://www.fool.com/investing/general/2015/08/19/lesson-learned-netflix-prices-will-never-skyrocket.aspx&gt;

Dino G, 2014, “ Netflix raises price by $1 for new customers, The Huffington post, retrieved 30 April 2016.<http://www.huffingtonpost.com/2014/05/09/netflix-price-increase_n_5294450.html&gt;

Reed H, 2011, ”An Explanation and some reflections”, Netflix media center, Retrieved 30 April 2016.<https://media.netflix.com/en/company-blog/an-explanation-and-some-reflections&gt;

 Robbie A, 2014, “ The Rise of Netflix and Fall of Blockbuster, retrieved 29 April 2016. <http://www.ymedialabs.com/the-rise-of-netflix-and-fall-of-blockbuster/&gt;

 

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