The document discusses Netflix's pricing strategies, particularly the controversial price hike in July 2011 that led to significant backlash and a drop in stock value. It outlines the company's approach to pricing, including six steps for setting a pricing policy, and compares Netflix's offerings against competitors. Despite losing some subscribers due to the price increase, Netflix reported revenue growth, indicating a mixed response to its pricing changes.

1. KU Jour 820 – Marketing Fundamentals What’s the Buzz – Pricing Strategies – Nov. 9, 2011 Danny Kim and Peggy Lim

2. Netflix Videos Video of Reed Hastings (713 likes; 5,000 dislikes) http://youtu.be/c8Tn8n5CIPk Conan Video: http://youtu.be/s4d-di_n3QE South Park "I'm Sorry" spoof Hitler spoof (1:28 min – 2 min): http:// youtu.be/EpKGHOvqsFc

3. Video Quiz: Do you use Redbox ? Do you use Netflix ? For DVDs? For streaming? Did you cancel your subscription after the Netflix price hike?

4. Netflix Price Increase: Play by Play Jul. 12, 2011 announced ~ 60% price hike: From $9.99 for unlimited streaming + 1 DVD-at-a-time To $7.99 for streaming + $7.99 for 1 DVD-at-a-time Effective Sept. 1, 2011 Announced via email, blog and social media Reaction / Backlash 5000 comments on blog Heated discussion on Facebook and Twitter Hitler spoof: http:// youtu.be/EpKGHOvqsFc

5. Netflix Price Increase: Play by Play Sept. 18, 2011 CEO Reed Hastings apology “ I messed up.” “ Companies … die from moving too slowly.” (e.g. Borders and AOL) DVDs by mail would become “Qwikster” Separate websites “ Streaming and DVD by mail are two different businesses… we need to let each grow and operate independently.” Oct 10: Nevermind, No Qwikster “ DVDs will be staying at netflix.com” http://blog.netflix.com/2011/09/explanation-and-some-reflections.html http://blog.netflix.com/2011/10/dvds-will-be-staying-at-netflixcom.html South Park "I'm Sorry" spoof

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. Source: “Netflix Business Opportunity: Some Background for Candidates,” Reed Hastings Slideshare PowerPoint http://www.slideshare.net/reed2001/netflix-business-opportunity-5854575

8. Source: “Netflix Business Opportunity: Some Background for Candidates,” Reed Hastings Slideshare PowerPoint http://www.slideshare.net/reed2001/netflix-business-opportunity-5854575

9. 6 Steps for Setting a Pricing Policy Selecting a pricing objective Determining demand Estimating costs Analyzing competitor costs, prices and offers Selecting a pricing model Selecting the final price

10. Step 1: Select a Pricing Objective Survival Maximum current profit Maximum market share Maximum market skimming Product quality leadership Other

11. Step 1 : Select a Pricing Objective Survival (As mature DVD industry wanes) Maximum current profit Maximum market share (Global expansion) Maximum market skimming Product quality leadership (Gain edge) Other

12. Step 2 : Determine Demand Sources: 2011 Pearson Education, Inc., Q3 2011 Netflix Letter to Shareholders About 810,000 subscribers cancelled the service. Loss: About 3 percent of Netflix’s 23.8 million subscribers. But 97 percent stayed. And Q3 ‘11 revenue was up 44% YOY , while unique subscribers was up 42% YOY . - 66% - 5% Elastic or Inelastic?

13. Step 3: Estimate Costs DVD Costs Little fixed cost. In U.S., buy DVD once; rent as long as want. Almost all variable cost: postage, labor. Cash cow Long-term residual market; years of decline Streaming Costs Fixed cost: licenses. Added $1.3 billion in content assets in ’11 Lower variable costs 8% margins Competitors will shape long-term margins Sources : 2011 Pearson Education, Inc., Q3 2011 Netflix Earnings Conference Call

14. Step 4: Analyze Competitor Costs, Prices and Offers User-generated News Sports TV shows Movies Music videos Adult / porn Instructional To have profitable growth in such a large market, Netflix must find a segment in which it can gain and maintain leadership. Netflix’s segment: consumer-paid streaming subscription of TV shows and movies. Source: “Netflix Business Opportunity: Some Background for Candidates”

15. Step 4: Analyze Competitor Costs, Prices and Offers Free advertiser-paid (YouTube, Hulu, ABC) FREE. Bigger threat if Google improves ad targeting. (Pirated, too.) Consumer-paid (Hulu+, Amazon Prime) $7.99 / month Hulu+ for current season, less prior season stuff $79/yr - Free w/ Amazon Prime, small fraction of Netflix titles Pay-per-view (Apple, Amazon, Vudu, etc.) $0.99-$3.99 / movie on Amazon to rent; newer releases $2.99-$4.99 / movie to rent on Apple iTunes; $9.99-$14.99 to buy $0.99-$5.99 on Vudu to rent films. $1.99-$2.99/ TV episode Cable / Telco / Satellite (HBO, Dish, DirecTV, etc.) $60 / month for cable package (includes $15 HBO add-on) Netflix advantage: unbundled, on-demand, large catalog, cost

16. Step 4: Analyze Competitor Costs, Prices and Offers Global Expansion Why? Video is global 80% of YouTube users not in U.S. Approach: $8 unlimited streaming everywhere Canada: In 1 year, 1 mn subs., 10% penetration Latin America: Sept ’11 launched in 43 countries UK & Ireland in Q1 ’12 Sky Movies £16 ($25/mo) + £12 ($19) BBC license fee , 4.5 mn subscribers Lovefilm, DVDs, £12 ($19), 1 mn subscribers Debit/credit card users; low piracy; broadband Source: “Netflix Business Opportunity”

17. Step 5: Select a Pricing Method Value pricing: Win loyal customers by charging a fairly low price for a high-quality offering Break even volume : Fixed Cost / (Price – Variable Cost) Sources: 2011 Pearson Education, Inc.

18. Step 6: Select the Final Price Set the Price Communicate the Price (Increase) Add value: “No grand gestures, just amazing service day-after-day, for an incredibly low price.” Do: Unbundle Give people a head’s up about the change Don’t Make sudden increases without perceived benefits Sources: Q3 2011 Netflix Letter to Shareholders

19. Source: “Netflix Business Opportunity: Some Background for Candidates”

20. Questions & Answers

21. Video Timeline: 1970s to present VHS dominates the 1970s, ’80s, ’90s; Blockbuster founded in 1985 DVD and Netflix arrive in 1997 RedBox begins to roll out in 2004 (then with McDonalds; now with Coinstar) Blockbuster goes bankrupt in 2010, Dish Network acquires it in 2011

22. Step 3: Estimate Costs Source: “Netflix Business Opportunity: Some Background for Candidates” “ Virtuous Cycle”