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Netflix: A Price Hike Ahead Is Good News

April 26, 2014 | About:
shash63

shash63

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As the saying goes, for the success of any online portal service, “Content is the King.” With this belief, Netflix is focused on increasing its content so that it can provide a richer online streaming library to its subscribers. The company also plans to increase its subscription cost and the revenue from the price hike can partly be used for content generation to offer quality service. Netflix (NFLX) announced plans to raise its prices for new customers recently, despite raking in bumper first quarter profits.

Netflix's experience with price hikes in the past has been disastrous. It witnessed a major dropout in customers after the price hike was introduced in 2011. Although the price hike then was an attempt divide its DVD renting from Digital only subscribers. It has been three years and with subscribers getting more and more hooked to Netflix, its rich content library will definitely retain customers even after the price hike.

Chief Executive Reed Hastings said that “increasing subscription rates would help the firm acquire more content and deliver an even better stream experience."

Now, Netflix is all focused on escalating original content, mainly “House of Cards” and a hot favorite “Arrested Development.” HBO has also introduced streaming service “HBO Go” and both Netflix and HBO are in a head on rivalry, with each working to increase the subscriber count. The only advantage that Netflix has over HBO is pricing, a cost conscious subscriber will always be partial to Netflix given a choice between HBO & Netflix.HBO charges $16 per month for premium channels as compared to $8 charged by Netflix.

Netflix has been experimenting with its price increase strategy in Ireland, and did not face any major impact in terms of drop out. In January, this year, its increased the price from €6.99 to €7.99. The company also feels that existing customers will not be affected by the price increase instantly, and have been provided with a generous grace time. In Ireland, existing customers were provided a grace for almost 2 years for the revised rates, although the new customers were effected by the price hike.

Recent results

Netflix recently declared its first quarter earning results. The price increase was revealed during this period by Netflix. The estimated increase in price will be in between $1-$2 for new customers. This price hike will show its effect later this quarter and is applicable in certain countries only. The company announced a net profit of $53 million, or $0.86 per share, for the quarter, beating analysts' estimates of 83 cents. Revenue jumped 24%.

The company continues to add new members. In the quarter, it added 2.25 million members with total member count reaching 58 million globally.

Netflix is also increasing it global client base and added 1.75 million international clients, which now totals 12.7 million. International revenue contributes to 25% of the total revenue, but the company expects international revenue to beat the revenue of the U.S. in the future.

Journey Ahead

The company’s urge for increasing the customer base is rising by setting self defined goals. Although it is approaching 50 million users but it eyes a wider base as it compares with the subscriber base of HBO, which is around 130 million

The new series of Orange Is the New Black is an another Netflix commissioned show which makes its debut in June. The company plans exhaustive investment in marketing to attain a higher subscriber base and it also relies on high quality content to achieve this.

Conclusion

The price increase policy for Netflix is on the surface, but it is literally just a few dollars and cents, so it should not have any adverse impact on Netflix’s customer base. On the contrary, this price increase will always benefit the top and bottom line of Netflix in the future. The extra revenue generated from the price rise will offset the cost that will be incurred form enriching the content as planned by Netflix. The improved streaming quality and content would further assist Netflix in increasing the customers and also leverage the bottom line.


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Comments

Dr. Paul Price
Dr. Paul Price premium member - 6 months ago

What do you think NFLX is worth? How would you arrive at that figure?

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