Using the Netflix Rate Increase as a Study in Increasing Prices
Netflix’s recent decision to raise monthly membership fees for new subscribers by $1-$2 offers an opportunity to examine a critical phase in the evolution of a subscription product: When and how to institute a rate hike.
May 30 2014 by Tom Caporaso
The optimal time is “after a careful, deliberate process,” but events unfold so quickly, in e-commerce and subscription commerce, that extended deliberations aren’t always feasible. As a streaming content provider, Netflix is in a very competitive industry, with rivals and challenges emerging almost daily.
Netflix is also painfully aware of the risks of price increases. In 2011, it split its service into two separate lines, DVDs by mail and streaming videos, which effectively raised fees by 60% for subscribers who wanted both options. About 800,000 customers cancelled their subscriptions, causing investors to flee; the company’s stock price fell more than 80%.
Nevertheless, Netflix knew it had to raise membership fees again to maintain its leadership position in the streaming content market. Netflix already has $7 billion in obligations for its library of original and licensed shows. Those costs will only grow as more companies, including Amazon and AT&T, enter the market. Netflix is now paying to provide subscribers a first-rate experience after contracting with Comcast and Verizon to guarantee access to high-speed broadband.
APPLYING THE NETFLIX EXPERIENCE TO YOUR BUSINESS
Not every company will face circumstances that lay out the case for a price increase so starkly, but every subscription-based company needs to raise its rates periodically, if only to keep up with inflation. That doesn’t make the decision any less perilous, but there is one specific step you can take to mitigate the risks and help ensure the new fee you choose won’t price you out of business (or profitability): Comprehensive testing of new prices to measure their effects on your desired audience.
For subscription commerce companies like Netflix, the measurable effects include conversion rates, acquisition and retention costs, customer lifetime values and usage rates. Whatever your testing parameters may be, you need to gather as much data as possible before implementing a rate hike, which will require, among other things, a broad range of metrics, A/B tests, and a large sample group. Here are a few tips:
Test various prices. What people claim they’ll pay for a product or service and what they’ll actually pay when faced with a higher price are often two different things. When it comes time to choose the new price, the knowledge gained from your price experiments will let you make an informed decision.
Measure long-term effects. In subscription commerce, a higher join price can adversely affect initial conversion rates, but it could pay dividends in the end by increasing the average member’s lifetime value. Overall profitability is the goal, so don’t rush through the price-testing process; give it the time necessary to develop reliable data on every potential consequence.
Consider a “grandfather” clause. Raising rates on your best customers can be self-destructive. Not only might you lose a core audience segment, you risk reputational damage if you fail to honor any implicit or explicit promises you may have made over the years. Guaranteeing current prices for your current customers, even if only for a certain period, can help assuage their fears while preserving and fortifying the brand image your company has endeavored to establish.
Offer something to justify the price increase. At a time when the vast majority of consumers have been squeezed by stagnant income growth and rising prices, the fact that your own costs have gone up isn’t likely to win you any sympathy. Touting an expansion of your product’s benefits or services, or simply offering customers a one-time premium, could reduce the backlash from your audience.
It’s too soon to determine whether Netflix implemented its price increase successfully. However, its successes and failures provide a great learning environment for other CEOs with subscription-based business models.
Tom Caporaso is CEO of Clarus Marketing Group.