How (Not) to Raise Prices


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Over the past month, three well-loved brands in the digital entertainment business have created a flurry of negative buzz about recent price hikes. Netflix changed its subscription pricing models, resulting in higher monthly rates for many long-time subscribers. Apple changed the commission structure for “in-app” media purchases, causing many publishers and online retailers to remove the “purchase more books/movies/TV shows now” links from their apps. Among the media suppliers impacted by Apple’s move was Amazon. One of the benefits of using the Amazon Kindle app on a variety of mobile platforms is that you can buy more books quickly and easily and download them immediately. Now Apple has made that harder to do on the iPhone and iPad.

One thing that customers love about Netflix, Apple, and Amazon is the ability to consume digital content quickly and easily. All three companies make their “stores” and their players/readers available on multiple devices. Apple’s iTunes is available from both PC and Mac, and you can play music and media you purchase from iTunes on non-Apple devices. Netflix lets you stream and play movies on over 200 Internet-connected devices. Amazon’s Kindle reader runs on iPhone, iPad, Mac, Windows PC, Windows Phone 7, Android, or Blackberry. Both Amazon and Apple have made an art form out of impulse purchases—particularly of digital content. The reason sales of digital goods have soared is that they are easy and convenient to purchase on a whim. Netflix makes the digital subscription model work by providing “all you can watch” plans at affordable prices.

Both Netflix and Apple have made pricing changes that have adversely impacted customers (in Netflix’s case) and partners (in Apple’s case). But our take is that Netflix’s price hike will damage its customer loyalty less than Apple’s in-app commission structure. Here’s why.

Netflix Price Hike Is Not That Customer Unfriendly
Netflix’s new pricing for DVDs went down from $9.99 to $7.99 for people like my mom who only want 1 DVD/month. For those of us who have been enjoying the combination of unlimited DVD delivery AND unlimited streaming video, there is a whopping 60% price hike if you continue to opt for both unlimited DVDs and unlimited streaming. Netflix describes it this way: “With this change, Netflix will no longer be offering unlimited plans that include both streaming and DVDs by mail. The unlimited streaming plan will remain at $7.99 a month. The price for getting both unlimited streaming and unlimited DVDs will be $15.98 a month ($7.99 + $7.99).” These prices went into effect immediately for new customers and will take effect for existing customers on September 1st, 2011. So customers have 60 days to do the analysis and decide what to do.

Amid the hue and cry on Twitter and Facebook and the blogosphere about the Netflix price hike, there has also been some insightful analysis. For example, Eddie Yoon wrote “Why I’m Happy Netflix Raised Its Prices.” In it, he explains that even though he is usually a skinflint, he appreciates Netflix’s generosity and the value his family receives from its service (including the ability to stream and watch different videos on an unlimited number of family members’ devices), so he’s actually okay with the pricing change that separates DVD delivery from “all you can eat” streaming download pricing. In his blog post describing his reaction to the Netflix price hike, Eddie says:

“As a growth strategist, I have deep admiration for the price increase Netflix is implementing. They did three things that many companies don’t have the guts to do.

First, they had keen self-awareness and were honest about the future of their products. CEO Reed Hastings recently noted that DVDs have peaked. Not everyone can look at their core business and say its best days are behind it.

Second, they had a precision understanding of their Value = Benefits/Price equation. And they understood their true competitive set and their benefit domain. What they found was that $16/month is still cheaper than buying one DVD. I’m sure most Netflix users are consuming 10X more content than 1 DVD in a month. And it is far cheaper than a cable bill of $100/month.

Third, they had the courage to execute their portfolio strategy. Some companies know which businesses are Strategic Growth Engines vs. Manage for Margin businesses. Of those that know, few act on it. Netflix raised price on their Manage for Margin business (DVDs), to raise profits to acquire content and to steer consumers to streaming.

Finally as an observer of e-commerce, I applaud Netflix for going against the philosophical grain of “everything online should be cheaper and eventually free.” Sure, I would like my favorite products and services to be cheaper, but I would really like them to be improved to make my life better. Many e-commerce businesses are overly fixated on price. Far too many are fundamentally Supply Based Profit Models, whose primary method of value creation is by extracting and transferring it from someone else on the value chain. This is not sustainable and rarely leads to long-term innovation and increased value for the consumer.”

~ Eddie Yoon, Principal, The Cambridge Group

As a long-time Netflix customer and devotee, I have to admit that I, too, was not put off by the pricing change. It caused me to think about my family’s media consumption patterns and to realize that the red-jacketed DVDs just lie around unused in front of our TV, while I often find myself watching video on demand either on my TV or my iPad. So I’m fine switching to a streaming-only pricing model. What I am concerned about, however, is the quality of the streaming video—which is more a reflection of my cable provider’s ability to provide enough Internet bandwidth for everyone on my street.

Bottom line: Netflix’s pricing changes seemed reasonable to me and reflected my changing patterns of consumption. The company gave me an option that allows me to keep doing what I’m doing—watching movies on demand—for the same price I was already paying for DVDs (that I’m not watching) + streaming video (that I’m already doing). What makes this work is the fact that Netflix’s pricing model reflects its customers’ changing patterns of consumption.

But Apple’s In-App Purchase Commissions Are Creating Friction for Customers
For the past few weeks, I’ve been receiving notices from publishers (Financial Times) and retailers (Amazon) whose apps I use on my iPod Touch and my iPad. They’ve been exhorting me to download their “new” i-apps, with new and improved functionality. But what’s really driving this shift is the fact that Apple announced back in February 2011, that it would collect 30% of revenues for content (subscriptions and other content, like books and movies) sold within the app itself. As of June 1st, that policy apparently took full effect.

Amazon has been the most recent content provider to let me know that my current Kindle for iPad app needs to be upgraded in order to eliminate the in-app purchasing option. This is really sad and inconvenient. Those of us who are Kindle devotees love two things about using the Kindle app: first, it’s ubiquitous. You can read your e-books on multiple devices, picking up where you left off on the last one. Second, it’s really easy to buy another book or two when you’re thinking about it—from within your Kindle app. I find that I think of new books to read while I’m reading. Either I want more books from the same author, or I’m just about finished with a book and I want to get another one ready, or I’m about to board a plane or go somewhere where I can’t be online and I want to download a bunch of stuff. But I love the ability to buy more books from my Kindle reader. I do it from both my Kindle device and from my Kindle app on my iPad. Now, since Apple is taking 30% of Amazon’s profits—e.g., what’s left after they’ve paid royalties to the author/publishers—Amazon is losing too much money to Apple.

I understand that Apple can exact a toll from publishers and retailers of digital content. But if Apple had set its commission structure lower—say 30% for the first in-app purchase and 5% for subsequent in-app purchases—that might have kept all the content providers from stampeding away from in-app purchases. The result for customers is that we now have to take more steps to buy digital goods (e.g., leave the app, click open a browser, navigate to the web site, find the content we want, buy it, then return to the Kindle app to access it). That’s bound to result in lower sales volume for everyone involved.

The Moral: If You’re Going to Raise Prices, Don’t Add Steps to Customers’ Scenarios
Apple seems to be betting on the fact that suppliers of digital media will pay a premium to offer their content seamlessly to iPhone users. But the company has apparently stepped way over the threshold of acceptable commissions. Apple has also violated two important tenets of good customer-centric ecosystem practices:

1) Don’t require your partners to provide a suboptimal experience in order to be part of your ecosystem.

2) Don’t assume your partners will choose your ecosystem over all others’. The Internet/mobile space is not an either/or business venue, but an also/and marketspace. Customers will select the brand experiences they prefer and will want to enjoy those experiences across multiple platforms and ecosystems.

Netflix, on the other hand, is likely to rebound nicely from the customer backlash and disaffection currently being played out in social media. As customers settle down and evaluate their own consumption patterns, they’re likely to find it both cost-effective and convenient to stick with Netflix for much of their premium content.

For more on this topic, see Ronni Marshak’s Perspective on why the Apple commission has alienated customers who were fans of both Apple and Amazon, but now no longer trust Apple.

Apple Sacrifices Customer Experience for Revenue
Lowering Customer Satisfaction by Adding Friction to a Seamless Experience
By Ronni T. Marshak, Executive VP and Senior Consultant, August 4, 2011

Republished with author's permission from original post.

Patricia Seybold
With 30 years of experience consulting to customer-centric executives in technology-aggressive businesses across many industries, Patricia Seybold is a visionary thought leader with the unique ability to spot the impact that technology enablement and customer behavior will have on business trends very early. Seybold provides customer-centric executives within Fortune 1 companies with strategic insights, technology guidance, and best practices.


  1. I’ve been a fan of Patricia’s for many years, but her comments about Netflix’s price change is missing a point — new/recent releases are only available on DVDs not streaming — so if you want streaming and current releases, your hit with an unreasonable 60% price increase. Not good.

  2. Hi,

    A real peeve that I see on price increases come from the food packaged goods and the fast food industries.

    Look at companies like Frito Lays, they have decreased the size of their potato ships and charge the same prices, no good, no communications to customers, not good.

    Take a look at Wendy’s, their chicken sandwich is smaller relative to 6 months ago, McDonalds value burgers, you need a magnifying glass to see the meat, another recent price increase!!!

    Do these companies see consumers as stupid….yes they do by these price increases, consumers need to vote with their wallets.

    As far as the examples provided, Amazon has smoked Apple by using HTML5 to create a web based store. It seems that Apple or Amazon seem to care more about their shareholders that their customers…guess Apple need to add to the 68 billion they are hording, too many people are lemmings and follow each other, vote with your wallet, I no longer have any Apple products, the other platforms may not be as user friendly initially, once you invest the time…they are user friendly ie Android


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