Question

Netflix sells a subscription service to 2 types of customers: hardcore movie-watchers who usually watch 10 movies a month and value the service at $50 a month (or $5 per movie), and casual movie-watchers who usually watch 5 movies a month and value the service at $20 a month (or $4 per movie). There are an equal number of customers of each type. Which of the following pricing strategies generates the most profit for Netflix?

		price the subscription as free and charge $4 per movie
		price the subscription as free and charge $5 per movie
		price the subscription at $10 and charge $4 per movie
		price the subscription at $10 and charge $5 per movie
		price the subscription at $20 and charge $3 per movie
		price the subscription at $20 and charge nothing for each movie watched
		price the subscription at $50 and charge nothing for each movie watched

Answer 1

a) If netflix charges $4 per movie and charge nothing for the subscription, then casual movie watchers and the hardcore movie watchers both will value the service.

For example, there are 10 hardcore movie watchers who watch 10 movies in a month and 10 casual movie watchers who watch 5 movies in a month, charging $4 for each movie will help netflix earn a profit of

[(10*$4)*10]+[(5*$4)*10]=$600.

This will be the maximum profit netflix will earn. No other strategy will help netflix earn so much profit.

b) Casual movie watchers will not pay $5 for each movie as they are provided with service at $4 only for each movie. So the demand for the service will automatically decrease if netflix charges $5 per movie.

c) Casual movie watchers who enjoy Netflix service at $4 per movie will not be willing to pay an additional $10 subscription charges.

d) Netflix will lose many of its casual movie watchers clients if it charges $5 per movie and an additional $20 for subscription. As the casual movie watchers are only ready to pay $4 per movie.

So the best option to generate maximum profit is option A.

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