case study
Netix Price Increase Hurts Membership Maximum Marks: 50 Netflix experienced some mnbership turbulence in 2016 asa 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 $810 59. 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 Netix 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 aftera 201] 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, Netix 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 Streamlgglmlllionsl Q; 2015 9'! 2015 Q 2015 Q; 2016 Q; 2016 Q; 3316 Revenue 1026 1064 1105 1161 1208 1311: Contribution Profit 340 344 319 413 414 435 Contribution Margin 33.1% 32.3% 34.3% 35.6% 34.3% 36.4% Paid Memberships 41.1 42.1 43.4 45.? 46.0 116.5 Total Memberships 42.3 43.2 44.7 47.0 47.1 4?.5 Net Additions 0.90 0.88 1.56 2.23 0.16 0.40 Monthly Revenue per Paid Member S 3.33 S 8.43 s 8.49 S 3.4? 5 are 5 9.40 Fe montage Chg. Rev 3.7% 3.9% 5.0% 4.0% 19% Fe rcentage Chg. Memberships 2.5% 3.2% 5.3% 0.8% 0.9% Source: Netix 1061 Q3, 2016 According to a MarketWatch articlel on 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 "chum.\" Netflix did not at-out say in its letter to investors that 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 3]. 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. Based on the above information. you are required to answer the following questions. it) Use the information in the case to estimate the elasticity of demand for Netflix subscription services. 20 b) What do we expect to happen to Netflix's revenue due to the price increase? l0 c) What do we expect to happen to Netflix's prot dueto the price increase? 10 d) Why did Netix stock get hammered after releasing results? 10
