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 itsstandard 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 $7.99per month to $9.99per month.Netflix began notifying customers in April that the price increase would become effective in the second quarter.Previously 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 implementationof theprice 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%

According to a MarketWatch article1on the price increase:Netflix said Monday that customers who learned in April that the price was about to increase had begun canceling their subscriptions, leading to unexpected “churn.” Netflix did not flat-out say inits letter to investorsthat the price increase led to higher churn among subscribers, however, instead saying it coincided with “press coverage” of the rate hike and that subscribers misunderstood “the news as an impending new price increase rather than the completion of two years of grandfathering.”The stock market reacted to news of Netflix price increase as well. The stock closed at $102.23 as of March 31, 2016. After the release of second quarter earnings in July, the stock price had fallen to $85.84 per share, a decline of 16%. This decline wiped out almost $7 billion of shareholder value during this period. Most of this decline was immediately following the release of the second quarter numbers.With competition increasing in for streaming services, especially with the growth of Amazon Prime Video and Hulu, the decline in membership growth could be a troubling sign.After review of the information above, consider your role as a consultant, and begin to develop a method of explaining what the situation is about. Offer convincing evidence of deep thought, and address the following;

1. Calculate the the price difference from the first quarter to the end of the third quarter. (2 consecutive quarters). You may use the List Price, however this does not reflect the impact over a specific period prior to the increase. Alternatively, you could use the Monthly Revenue Per member and calculate the difference from this provided data.

2. Calculate the change in membership. Estimate the loss in membership from the price increase. Consider the average growth over the four quarters –growth projected (average number of subscribers), and consider the real data of number of subscribers added. How many subscribers have they lost?

3.Anticipate the impact of the price increase to revenue, and marginal cost.Based on the elasticity of demand, and your review of the data, will you advise Netflixto institute another price increase in the next 3 years to support expanded programing?

Answer 1