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KU Jour 820 – Marketing Fundamentals What’s the Buzz – Pricing Strategies – Nov. 9, 2011 Danny Kim and Peggy Lim
Netflix Videos   <ul><li>Video of Reed Hastings (713 likes; 5,000 dislikes)  http://youtu.be/c8Tn8n5CIPk   </li></ul><ul><...
Video Quiz: <ul><li>Do you use  Redbox ?  </li></ul><ul><li>Do you use  Netflix ? For DVDs? For streaming? </li></ul><ul><...
Netflix Price Increase: Play by Play <ul><li>Jul. 12, 2011 announced ~ 60% price hike: </li></ul><ul><ul><li>From $9.99 fo...
Netflix Price Increase: Play by Play <ul><li>Sept. 18, 2011 CEO Reed Hastings apology </li></ul><ul><ul><li>“ I messed up....
Netflix Price Increase: Play by Play Stock prices fell about  74 percent  in value from $300 per share from July 13, 2011 ...
Source: “Netflix Business Opportunity: Some Background for Candidates,” Reed Hastings Slideshare PowerPoint  http://www.sl...
Source: “Netflix Business Opportunity: Some Background for Candidates,” Reed Hastings Slideshare PowerPoint  http://www.sl...
6 Steps for Setting a Pricing Policy <ul><li>Selecting a  pricing objective </li></ul><ul><li>Determining  demand </li></u...
Step 1:  Select a Pricing Objective <ul><li>Survival  </li></ul><ul><li>Maximum current profit </li></ul><ul><li>Maximum m...
Step 1 : Select a Pricing Objective <ul><li>Survival   (As mature DVD industry wanes) </li></ul><ul><li>Maximum current pr...
Step 2 : Determine Demand Sources:  2011 Pearson Education, Inc., Q3 2011 Netflix Letter to Shareholders  <ul><li>About  8...
Step 3:  Estimate Costs <ul><li>DVD Costs </li></ul><ul><li>Little fixed cost.  </li></ul><ul><li>In U.S., buy DVD once; r...
Step 4:  Analyze Competitor Costs, Prices and Offers <ul><li>User-generated </li></ul><ul><li>News  </li></ul><ul><li>Spor...
Step 4:  Analyze Competitor Costs, Prices and Offers <ul><li>Free advertiser-paid (YouTube, Hulu, ABC) </li></ul><ul><ul><...
Step 4:  Analyze Competitor Costs, Prices and Offers <ul><li>Global Expansion </li></ul><ul><ul><li>Why? Video is global <...
Step 5:  Select a Pricing Method <ul><li>Value pricing:  Win loyal customers by charging a fairly low price for a high-qua...
Step 6:  Select the Final Price <ul><li>Set the Price </li></ul><ul><li>Communicate the Price (Increase) </li></ul><ul><li...
Source: “Netflix Business Opportunity: Some Background for Candidates”
Questions & Answers
Video Timeline:  1970s to present <ul><li>VHS  dominates the 1970s, ’80s, ’90s;  Blockbuster  founded in 1985 </li></ul><u...
Step 3:  Estimate Costs Source: “Netflix Business Opportunity: Some Background for Candidates” “ Virtuous Cycle”
 
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Netflix's Pricing Increase

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KU Jour 820 - A review of Netflix's recent price change, the rationale behind it and the communications around it.

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Transcript of "Netflix's Pricing Increase"

  1. 1. KU Jour 820 – Marketing Fundamentals What’s the Buzz – Pricing Strategies – Nov. 9, 2011 Danny Kim and Peggy Lim
  2. 2. Netflix Videos <ul><li>Video of Reed Hastings (713 likes; 5,000 dislikes) http://youtu.be/c8Tn8n5CIPk </li></ul><ul><li>Conan Video: http://youtu.be/s4d-di_n3QE </li></ul><ul><li>South Park &quot;I'm Sorry&quot; spoof </li></ul><ul><li>Hitler spoof (1:28 min – 2 min): http:// youtu.be/EpKGHOvqsFc </li></ul>
  3. 3. Video Quiz: <ul><li>Do you use Redbox ? </li></ul><ul><li>Do you use Netflix ? For DVDs? For streaming? </li></ul><ul><li>Did you cancel your subscription after the Netflix price hike? </li></ul>
  4. 4. Netflix Price Increase: Play by Play <ul><li>Jul. 12, 2011 announced ~ 60% price hike: </li></ul><ul><ul><li>From $9.99 for unlimited streaming + 1 DVD-at-a-time </li></ul></ul><ul><ul><li>To $7.99 for streaming + $7.99 for 1 DVD-at-a-time </li></ul></ul><ul><ul><li>Effective Sept. 1, 2011 </li></ul></ul><ul><ul><li>Announced via email, blog and social media </li></ul></ul><ul><li>Reaction / Backlash </li></ul><ul><ul><li>5000 comments on blog </li></ul></ul><ul><ul><li>Heated discussion on Facebook and Twitter </li></ul></ul>Hitler spoof: http:// youtu.be/EpKGHOvqsFc
  5. 5. Netflix Price Increase: Play by Play <ul><li>Sept. 18, 2011 CEO Reed Hastings apology </li></ul><ul><ul><li>“ I messed up.” </li></ul></ul><ul><ul><li>“ Companies … die from moving too slowly.” (e.g. Borders and AOL) </li></ul></ul><ul><ul><li>DVDs by mail would become “Qwikster” </li></ul></ul><ul><ul><li>Separate websites </li></ul></ul><ul><li>“ Streaming and DVD by mail are two different businesses… we need to let each grow and operate independently.” </li></ul><ul><li>Oct 10: Nevermind, No Qwikster </li></ul><ul><ul><li>“ DVDs will be staying at netflix.com” </li></ul></ul><ul><ul><li>http://blog.netflix.com/2011/09/explanation-and-some-reflections.html </li></ul></ul><ul><ul><li>http://blog.netflix.com/2011/10/dvds-will-be-staying-at-netflixcom.html </li></ul></ul>South Park &quot;I'm Sorry&quot; spoof
  6. 6. Netflix Price Increase: Play by Play Stock prices fell about 74 percent in value from $300 per share from July 13, 2011 to $77.37 on October 25, 2011.
  7. 7. Source: “Netflix Business Opportunity: Some Background for Candidates,” Reed Hastings Slideshare PowerPoint http://www.slideshare.net/reed2001/netflix-business-opportunity-5854575
  8. 8. Source: “Netflix Business Opportunity: Some Background for Candidates,” Reed Hastings Slideshare PowerPoint http://www.slideshare.net/reed2001/netflix-business-opportunity-5854575
  9. 9. 6 Steps for Setting a Pricing Policy <ul><li>Selecting a pricing objective </li></ul><ul><li>Determining demand </li></ul><ul><li>Estimating costs </li></ul><ul><li>Analyzing competitor costs, prices and offers </li></ul><ul><li>Selecting a pricing model </li></ul><ul><li>Selecting the final price </li></ul>
  10. 10. Step 1: Select a Pricing Objective <ul><li>Survival </li></ul><ul><li>Maximum current profit </li></ul><ul><li>Maximum market share </li></ul><ul><li>Maximum market skimming </li></ul><ul><li>Product quality leadership </li></ul><ul><li>Other </li></ul>
  11. 11. Step 1 : Select a Pricing Objective <ul><li>Survival (As mature DVD industry wanes) </li></ul><ul><li>Maximum current profit </li></ul><ul><li>Maximum market share (Global expansion) </li></ul><ul><li>Maximum market skimming </li></ul><ul><li>Product quality leadership (Gain edge) </li></ul><ul><li>Other </li></ul>
  12. 12. Step 2 : Determine Demand Sources: 2011 Pearson Education, Inc., Q3 2011 Netflix Letter to Shareholders  <ul><li>About 810,000 subscribers cancelled the service. </li></ul><ul><li>Loss: About 3 percent of Netflix’s 23.8 million subscribers. </li></ul><ul><li>But 97 percent stayed. And Q3 ‘11 revenue was up 44% YOY , while unique subscribers was up 42% YOY . </li></ul>- 66% - 5% Elastic or Inelastic?
  13. 13. Step 3: Estimate Costs <ul><li>DVD Costs </li></ul><ul><li>Little fixed cost. </li></ul><ul><li>In U.S., buy DVD once; rent as long as want. </li></ul><ul><li>Almost all variable cost: postage, labor. </li></ul><ul><li>Cash cow </li></ul><ul><li>Long-term residual market; years of decline </li></ul><ul><li>Streaming Costs </li></ul><ul><li>Fixed cost: licenses. </li></ul><ul><li>Added $1.3 billion in content assets in ’11 </li></ul><ul><li>Lower variable costs </li></ul><ul><li>8% margins </li></ul><ul><li>Competitors will shape long-term margins </li></ul>Sources : 2011 Pearson Education, Inc., Q3 2011 Netflix Earnings Conference Call
  14. 14. Step 4: Analyze Competitor Costs, Prices and Offers <ul><li>User-generated </li></ul><ul><li>News </li></ul><ul><li>Sports </li></ul><ul><li>TV shows </li></ul><ul><li>Movies </li></ul><ul><li>Music videos </li></ul><ul><li>Adult / porn </li></ul><ul><li>Instructional </li></ul><ul><li>To have profitable growth in such a large market, Netflix must find a segment in which it can gain and maintain leadership. </li></ul><ul><li>Netflix’s segment: consumer-paid streaming subscription of TV shows and movies. </li></ul>Source: “Netflix Business Opportunity: Some Background for Candidates”
  15. 15. Step 4: Analyze Competitor Costs, Prices and Offers <ul><li>Free advertiser-paid (YouTube, Hulu, ABC) </li></ul><ul><ul><li>FREE. Bigger threat if Google improves ad targeting. (Pirated, too.) </li></ul></ul><ul><li>Consumer-paid (Hulu+, Amazon Prime) </li></ul><ul><ul><li>$7.99 / month Hulu+ for current season, less prior season stuff </li></ul></ul><ul><ul><li>$79/yr - Free w/ Amazon Prime, small fraction of Netflix titles </li></ul></ul><ul><li>Pay-per-view (Apple, Amazon, Vudu, etc.) </li></ul><ul><ul><li>$0.99-$3.99 / movie on Amazon to rent; newer releases </li></ul></ul><ul><ul><li>$2.99-$4.99 / movie to rent on Apple iTunes; $9.99-$14.99 to buy </li></ul></ul><ul><ul><li>$0.99-$5.99 on Vudu to rent films. $1.99-$2.99/ TV episode </li></ul></ul><ul><li>Cable / Telco / Satellite (HBO, Dish, DirecTV, etc.) </li></ul><ul><ul><li>$60 / month for cable package (includes $15 HBO add-on) </li></ul></ul><ul><ul><li>Netflix advantage: unbundled, on-demand, large catalog, cost </li></ul></ul>
  16. 16. Step 4: Analyze Competitor Costs, Prices and Offers <ul><li>Global Expansion </li></ul><ul><ul><li>Why? Video is global </li></ul></ul><ul><ul><li>80% of YouTube users not in U.S. </li></ul></ul><ul><li>Approach: </li></ul><ul><ul><li>$8 unlimited streaming everywhere </li></ul></ul><ul><li>Canada: In 1 year, 1 mn subs., 10% penetration </li></ul><ul><li>Latin America: Sept ’11 launched in 43 countries </li></ul><ul><li>UK & Ireland in Q1 ’12 </li></ul><ul><ul><li>Sky Movies £16 ($25/mo) + £12 ($19) BBC license fee , 4.5 mn subscribers </li></ul></ul><ul><ul><li>Lovefilm, DVDs, £12 ($19), 1 mn subscribers </li></ul></ul><ul><ul><li>Debit/credit card users; low piracy; broadband </li></ul></ul>Source: “Netflix Business Opportunity”
  17. 17. Step 5: Select a Pricing Method <ul><li>Value pricing: Win loyal customers by charging a fairly low price for a high-quality offering </li></ul><ul><li>Break even volume : </li></ul><ul><li>Fixed Cost / (Price – Variable Cost) </li></ul>Sources: 2011 Pearson Education, Inc.
  18. 18. Step 6: Select the Final Price <ul><li>Set the Price </li></ul><ul><li>Communicate the Price (Increase) </li></ul><ul><li>Add value: “No grand gestures, just amazing service day-after-day, for an incredibly low price.” </li></ul><ul><li>Do: </li></ul><ul><li>Unbundle </li></ul><ul><li>Give people a head’s up about the change </li></ul><ul><li>Don’t </li></ul><ul><li>Make sudden increases without perceived benefits </li></ul>Sources: Q3 2011 Netflix Letter to Shareholders 
  19. 19. Source: “Netflix Business Opportunity: Some Background for Candidates”
  20. 20. Questions & Answers
  21. 21. Video Timeline: 1970s to present <ul><li>VHS dominates the 1970s, ’80s, ’90s; Blockbuster founded in 1985 </li></ul><ul><li>DVD and Netflix arrive in 1997 </li></ul><ul><li>RedBox begins to roll out in 2004 (then with McDonalds; now with Coinstar) </li></ul><ul><li>Blockbuster goes bankrupt in 2010, Dish Network acquires it in 2011 </li></ul>
  22. 22. Step 3: Estimate Costs Source: “Netflix Business Opportunity: Some Background for Candidates” “ Virtuous Cycle”
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