Netflix Price Increase Hurts Membership

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%

First, calculate the percentage increase in the relevant price from the end of Q1, 2016 to the end of Q3, 2016.

Second, assume that Netfix had decided to postpone their price increase in May 2016 for a year. Calculate what it is expected to have happened to their Membership/Quantity numbers from the end of Q1, 2016 to the end of Q3, 2016. These will be their "expected" quantities without the price increase.

Third, Calculate the percentage change in quantity with and without the price change

Fourth, calculate Netflix's Price Elasticity of demand using the period from the end of Q1, 2016 to the end of Q3, 2016, using your previous calculations.