Question

The deliverable for this assignment is a written report. You must address the following questions in your analysis. Question 1: What prompted the pricing change in the case of Netflix and the debit card fee in the case of BoA? What explanation did the companies offer their customers? Do additional research as required to answer these questions. Question 2: What explains customers’ reactions to the pricing plan change announced by Netflix and the fee proposal announced by BoA? Include in your discussion what role elasticity may have played. Identify the determinant of elasticity most applicable to the explanation you have provided. Question 3: How do you explain why Netflix and Bank of America reacted differently to essentially similar customer responses? Include in your discussion what role a consideration of elasticity may have played in the company decisions. Do additional reading and research as required. Identify the determinant of elasticity most applicable to the explanation you have provided. Question 4: How long did it take for Netflix to recover lost ground in terms of its subscriber base? Which determinant of elasticity is most applicable to your answer for this question? What did Netflix do to bring about this turnaround? This "compare & contrast" case study is based on two real-world examples of pricing strategy dating back to 2011. The expectation is that you will apply your understanding of elasticity of demand to explain the contrasting final decisions. A reading list is provided for your reference. 1. The Case of Netflix Netflix, the popular online movie rental company, was founded in 1997 by Reed Hastings and Marc Randolph. In 1998, the Netflix.com website was launched; it was the first online DVD rental and sales site. The dominant brick-and-mortar DVD rental company at the time was Blockbuster. In 1999, Netflix debuted its subscription service, allowing subscribers to rent DVDs for monthly subscription fees. Netflix went public on May 23, 2002, listing on NASDAQ with an initial offer price of $15 per share and raising $77.2 million. Between October 2002 and January 2004, the stock price had appreciated by more than 1,500%. The company did a 2-for-1 stock split in February 2004 when the price reached $80 (Caplinger, 2016). At the time of its IPO in 2002, Netflix had about 600,000 subscribers. In 2007, it introduced online streaming, allowing subscribers to instantly watch TV shows and movies on their laptops or computers. Between 2007 and 2011, the number of subscribers in the U.S. grew from 7.48 million to 23.53 million (Dunn, 2017). On July 11, 2011, the stock closed at $41.53 (price adjusted for dividends). The Misstep: On July 12, 2011, Netflix split up its existing one DVD at a time + unlimited streaming plan for $9.99 into 3 separate plans: (1) DVD only starting at $7.99, (2) streaming only for $7.99, and (3) DVD + streaming for $15.98 (Gilbert, 2012). The rate hike caused a loss of subscriber base from 24.8 million subscribers in end-June to 23.8 million subscribers in end-September (Pepitone, 2011). By July 29, the stock price had dropped to $37.99, a drop of 8.5% from July 11. By November 25, it had tumbled to $9.12, a plunge of almost 78% since the day of the announcement (closing prices from NASDAQ). The Final Decision: Despite subscribers and investors voting with their feet, the company defended its decision – albeit apologetically - and implemented the new pricing plans. 2. The Case of Bank of America (BoA) Bank of America was established in 1904 as Bank of America National Trust and Savings Association. The Bank of America (BoA) entity was formed in 1998 as a merger between the erstwhile BankAmerica Corporation and NationsBank. From checking and savings accounts to debit cards, credit cards, loans, and asset management, BoA provides a range of services for both households and businesses. In the words of CEO Brian Moynihan, "Bank of America has been helping connect people to what is most important to them for more than 200 years." (Bank of America website). In 2010, the bank had $916.11 billion in deposits. At 12% of market share, this ranked BoA number one in terms of deposits. It was followed closely by JP Morgan Chase and Wells Fargo, each of which had about 10% market share (Comoreanu, 2017). BoA stock is listed on the NYSE. On April 1, 1998, the stock closed at $38 (price adjusted for dividends). On September 1, 2008, the stock closed at $35. The bank suffered losses during the financial crisis; monthly stock price data reveal a low of $3.95 on February 1, 2009. After recovering to $17.83 by March 1, 2010, the stock price started declining again. The downtrend continued in 2011, with a drop of almost 19 per cent between March 1 and June 1 (from $13.93 to $11.24), and another 29 per cent to $7.91 by September 1, 2011. The Misstep: On September 29, 2011, Bank of America announced that, beginning in early 2012, it would start charging its customers $5 a month for using their debit cards (Rauch, 2011). The announcement was met with angry outrage by customers on social media. Reflecting the negative sentiment, stock price declined 7 per cent in the week following the announcement, from $6.35 on September 29 to $5.90 on October 6. It had recovered about 8 per cent to $6.83 on October 31, 2011; it may be noted that this price was still almost 14 per cent lower compared to the price on September 1. The Final Decision: Following the tremendous backlash from its card holders, BoA abandoned its plans. On November 1, 2011, it announced that it would not implement the debit card usage fee (Bernard, 2011).

Answer 1

I the case of Netflix the pricing change was prompted by the following reasons:

• Increased confidence in its market coverage: The Company became too confident over the time by receiving positive feedback from the customers and the stock markets over a long time. This confidence in the market became a over confidence when they split the shares in the stock market to increase the holding pattern. Also this led them to decide that there strategic decisions are going in the right direction owing to the increase in the customer base. The splitting of the rental plans were a further step in the path of increasing the holding volumes by splitting the holding pattern.
• The contention of elasticity of demand and supply: It must be that the streaming and DVD to all subscribers would be meaning a double dose of supply to all the consumers. Some of the subscribes would only be interested in DVDs and some only in Streaming but the current plan provided these features to all of its customers thus the actual burden of providing both the services would have to be reduced because of which a clear differentiation would have to be figured out between three segments of subscribers, namely only DVD, only streaming and a premium category with both facilities.
• The split was also a strategy to diversify the existing product offering of Netflix into three separate products segments in order to increase its market share of subscribers. This was economical than launching a new product or a service to attract more customers than to differentially offering existing services.
• Another reason for Netflix to split the charges was the increasing streaming licensing charges which was growing year on year as the subscriptions were increasing.

In the case of BOA the situation was different because of which pricing change in form of Debit card fee were imposed:

• The financial losses and the decrease in stocks prices triggered for an immediate requirement to generate enough revenue from its existing sources. Owing to its large customer base and the quantum of transactions that they must be doing this stet seemed perfect in order to generate revenue to fuel reserves.
• Also, the post-recession times after 2009 – 2011 must have witnessed fall in savings deposits and decrease in float of the accounts with the bank which would have reduced its credit giving capacity so to generate revenue and continue the multiplicity factor to be high the BOA should have decided to impose such charges on debit card transactions.

What explanation did the companies offer their customers?

• Netflix defended its split in subscriber plan by saying that the delivery of DVDs makes no sense to online customers in paying $2 extra as postal charges making it costlier. Though it was explained that the company believed that there are still many customers who are interested in DVDs as they are durable thus says that it is not financially viable for people who only wants DVDs.
• It was also said that “Creating an unlimited DVDs by mail plan (no streaming) at our lowest price ever, $7.99, does make sense and will ensure a long life for our DVDs by mail offering.”
• On the other hand BOA said that a federal rule passed on October 1 stating that the banks may charge their customers for debit card use. Also all banking corporations first followed BOA in its decision which they withdrew afterwards noticing migration of accounts and customer complaints and BOA was the last one alone with the decision to be revoked.

Do additional research as required to answer these questions.

Yes, additional research is required on the prevailing market dynamics at that time to better understand and interpret the situation.

Question 2: What explains customers’ reactions to the pricing plan change announced by Netflix and the fee proposal announced by BoA?

• There was a huge downfall in subscribers of Netflix over the announcement and the stock prices of the company.
• BOA witnessed closure and migration of accounts to other banks and also faced public uproar over the matter.