Question

Netflix experienced some membership turbulence in 2016 as a price increase was phased in for its US subscribers. In May 2014, Netflix announced that the price of its standard subscription service would increase from $8 to $9. However, established customers were allowed to stay at the $7.99 price for two years. In 2015, Netflix increased the standard price to $9.99. As a result of the pricing plan and the deferred price increase, in May, 2016, the standard pricing plan for long time customers of Netflix increased from $7.99 per month to $9.99 per month. Netflix began notifying customers in April that the price increase would become effective in the second quarter.

Netflix was trying to implement price increases more slowly after a 2011 increase led to negative publicity and a customer backlash. In that case, Netflix separated its streaming and DVD services, and charged separately for both services.

However, regardless of the implementation of the price increase, the higher monthly prices seem to have impacted the growth of membership among US subscribers. In the two quarters before the price increase, Netflix added net membership of 1.6 million and 2.2 million members. By contrast, the number of members added in Q2 was only 160,000, and in Q3 only 400,000. The Q2 growth in US subscribers was the lowest since Netflix began reporting those numbers in 2012.

US Streaming (millions)	Q2 2015	Q3 2015	Q4 2015	Q1 2016	Q2 2016	Q3 2016
Revenue	1026	1064	1106	1161	1208	1304
Contribution Profit	340	344	379	413	414	475
Contribution Margin	33.1%	32.3%	34.3%	35.6%	34.3%	36.4%
Paid Memberships	41.1	42.1	43.4	45.7	46.0	46.5
Total Memberships	42.3	43.2	44.7	47.0	47.1	47.5
Net Additions	0.90	0.88	1.56	2.23	0.16	0.40
Monthly Revenue per Paid Member	$       8.33	$       8.43	$       8.49	$       8.47	$       8.75	$         9.40
Percentage Chg. Rev		3.7%	3.9%	5.0%	4.0%	7.9%
Percentage Chg. Memberships		2.5%	3.2%	5.3%	0.6%	0.9%
				Source: Netflix 10Q Q3, 2016

1) In 2016 Netflix allowed its prices to increase for U.S. subscribers. Using the data on monthly revenue per paid member in the quarter before the price increase and at the end of the third quarter in 2016, calculate the percentage change. We will use it as a proxy for the percentage change in price.

2) Determine the average membership growth (net additions) before the price increase.

3) Using the projections in the previous question, assuming the growth rate would have stayed the same, how many subscribers Netflix may have expected to add in the 2nd and 3rd quarters of 2016 if it didn't allow the price to increase? How many subscribers did Netflix actually add in the 2nd and 3rd quarters of 2016? Comparting the two numbers how many subscribers were gained/lost due to price increase? What percentage change does it represent relative to the subscribership level in the quarter before the price change (use Total Memberships)?

4) Using the percentage changes in the price and subsriberships calculated in the previous questions, determine the own price elasticity of demand.

5) What do we expect to happen to Netflix's revenue due to the price increase?

Answer 1

ANSWER 1

Persentage in the price is calculated by using data for month revenue perpaid member in quarter before price increases.

May 2016 q2 2q6 the price are increased

monthly increase Q1 2016 Q2 2016 Q3 2016

perpaid member $8.47 $8.75 $9.40

• percentages change in price = 9.40- 8.47​ = ​0.93 = 0.10979​​
• 8.47 8.47

price incresing = 10.97

ANSWER 2

Average membership growth before the price increases ;

• The average membership growth before the price increase was 1.2 in year 2007, 1.9 in year 2008, 2.9 in year 2009 .
• before netflix increases the membership price , the average subscription till 2010 was about 7.7 mill.
• subscriber membership nearly 3.1 mill arrived in 4th quater alone.
• the company yied in the streaming higher profit more than produce of dvd .
• netflix expand its subscriber in the Q3 and finance more in the year 2012 around the globe.
• before the price increases , the price of the subscriptions service was only $7.99 toi $8.
• this makes the million of subscriber growth during before the 4Q.
• before the price increases the net additions of subscriber in Q3 was 0.90 but it deacreases to 0.88 in the Q3.

ANSWER 3

If growth rate would have stayed the same,no of subscribers netflix may have expected to add in 2nd and 3nd quarter of 2016 if not allow price of increase

actual total Q1 2016 Q2 2016 Q3 2016

membership 47.0 47.1 47.5

net additions 2.23 0.16 0.40

• expected total membership =a7 +3.559(a7) = 48.66+3.55(4866)
• 100 100
• = 47+1.6685 = 48.66+1.7274
• = 48.6685 = 50.38

• loss in subscribers 1.66-0.16 1.72-0.40
• (expected net additions) =0.50 = 1.32
• % change in relative to
• subscribes in Q, 2016    = 1.50x100 = 1.32x100 = 2.80
• 47 47

ANSWER 4

own price elasticity of demand using % change in the price and subscriberships ;;

Q1 2016 Q2 2016 Q3 2016

• total membership 47.0 47.1 47.5
• monthly revenue     $8.47 $8.75 $9.40
• %change in monthly 3.30 7.42%
• %paid membership 45.7 46.0 46.5
• %change in paid 0.65 1.08%

• own price elasticity of demand = % in members x price
• %in prices member
•   
• = 0.65 x 8.7 = 0.029
• 3.30 46.5   

ANSWER 5

Due to price increases netflix revenue change is ;

• after increaseing in the price in subscribe service to $9.10 $9.99, there is a possibility to double up the average profit margin of the revenue.
• as price of susbcribe increases the average membership subscribers in 2016 Q2= 47.1 increases to 475 in 2016 Q3.