Last week, Netflix announced that starting in September, they were splitting their two distribution modes–streaming video and by-mail DVD–into separate subscription plans, each costing $7.99 per month. Previously, the company offered both modes together for the price of $9.99 per month.
The public outrage that followed the price hike announcement was predictably critical of the decision. Customers were quoted in the press as being”dismayed by the price hikes” and many threatened to cancel their subscriptions. The Netflix company blog received thousands of responses–mostly negative–from customers and readers. All this prompted speculation that Netflix had underestimated how the price increase announcement would anger some customers.
According to CNET;
Netflix spokesman Steve Swasey confirmed that Netflix had indeed prepared employees to receive a certain amount of calls from those unhappy with the hike. Swasey said Netflix did not go into this with its eyes closed.
“We tested, we researched, we analyzed,” Swasey told CNET this evening. “We knew what the reaction would be. We are not surprised. We knew that there would be some people upset by the service and with the price being adjusted.”
Despite the many threats of customers abandoning their by-mail DVD service because of their announcement, I think Netflix knew exactly what they were doing. The price hike was part of a larger strategy to wean customers off the by-mail DVD service. Netflix instead, wants to focus on delivering movies and television shows via the Web to televisions, set-top boxes and other mobile devices. Raising prices by over 75% is one of the surest ways to drive customer behavior to this goal with the added benefit of raising margins for their existing (but soon to be non-core) by-mail DVD business.
I think Netflix knew exactly what they were doing–despite the planned negative reaction–and that the price hike is part of a larger strategy to wean customers off the by-mail DVD service, and to instead, focus on delivering movies and television
Here’s the takeaway: Pricing should always be included in your toolkit for effective strategy execution. In this case, Netflix was much more concerned with changing customer behavior than they were with increasing revenues and/or angering their customer base.
