Case #4: Netflix Pricing Strategy

Every year it seems as though I want to see quite a few movies that are coming out. Unfortunately, I only end up seeing probably 10% of them in theaters, leaving me to forget about them until my peers ask “Hey, did you see (insert movie title here)?”, to which I shamefully answer, “No… but I really wanted to…” A few months later I’ll start seeing commercials for the DVD release which often rekindles a sense of melancholy for surround sound, giant screens, and overpriced concessions. So, being a movie lover and a semi-frequent movie renter (when I can find the time), I wanted to investigate a company that I have yet to use for our last project.

Netflix: Making video rentals simple since 1998

Since its launch in 1998, the video rental industry was turned upside down with the launch of Netflix. This company developed a great business model for movie lovers. Originally, it started as a pay per rental business. Shortly after it changed to a subscription based model. You see, Netflix allows subscribers to select which movies they want to see. The subscribers select movies and put them in a queue. Netflix then send the subscribers whatever movie is next on their queue. When the user finishes the movie they send it back to Netflix, and then the company sends out the next movie on their queue. This allows subscribers the freedom to watch the movies they want to see, without the hassle of late fees or actually finding the movie in a rental store.

As far as pricing strategies go, Netflix uses a fixed pricing strategy. This means that the prices are the same for all customers. More specifically, I would say that Netflix uses a volume-based pricing strategy. This means that the company establishes separate price levels based on quantity purchased. The follow are Netflix’ Unlimited Plans:

$8.99 a month
1 DVD out at-a-time
(Exchange DVDs as often as you want)
plus
Instantly watch online on your PC or Mac or instantly on your TV via a Netflix ready device - all for no additional monthly fee. Instantly watch as often as you want, anytime you want.

$13.99 a month
2 DVDs out at-a-time
(Exchange DVDs as often as you want)
plus
Instantly watch online on your PC or Mac or instantly on your TV via a Netflix ready device - all for no additional monthly fee. Instantly watch as often as you want, anytime you want.

$16.99 a month
3 DVDs out at-a-time
(Exchange DVDs as often as you want)
plus
Instantly watch online on your PC or Mac or instantly on your TV via a Netflix ready device - all for no additional monthly fee. Instantly watch as often as you want, anytime you want.

Netflix also offers a Limited Plan:

$4.99 a month
1 DVD out at-a-time
(Limit 2 per month)
plus
Instantly watch up to 2 hours of movies (some new releases) & TV episodes (including current season) online on your PC or Mac for no additional fee.

These prices demonstrate how Netflix has created a service that can basically be afforded by anyone with an Intenet connection. Theoretically, a subscriber of the $16.99 a month package could watch 12 movies a month if they watch 3 movies every week. This is a steal compared to other rental stores. This would boil down to just about $1.42 for every movie.

Netflix financial history for the past 5 years

In quarter 4 (Dec ’08) Netflix had a net income of $22.73 million. In regards to yearly figures, the company had a net income of $66.61 million in 2007. The company jumped up to $83.03 million in 2008. The profit margin for Netflix has stayed around 6.08% for the past 2 years. The company also holds an astonishing market capital of 2.75 billion. (For more stats, visit http://www.google.com/finance?q=NASDAQ%3ANFLX)

Netflix is a ground shaking company. It even made Blockbuster reevaluate and redesign its movie rental strategy. I think that Netflix has also kept up with current trends. For example, since its launch the company has added Blu Ray DVDs, the option to watch moves instantly on a computer, and is currently developing a way for X-Box 360 users to watch movies on their gaming systems.

Netflix has created a model that is both affordable and convenient, which has ultimately allowed busy subscribers to indulge themselves in a movie rental bliss. Now if you’ll excuse me, I have some movies to catch up on.

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