Read the Netflix Pricing Case and answer the questions below.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 changeFourth, 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. Fifth, discuss how confident you are about your calculation and how it could be improved.Sixth, what is the expected effect of the price increase upon Netflix's Revenue; why?Seventh, what is the expected effect upon profits; why?.Seventh, can you explain the reaction of Netflix's stock price to the price increase?{Hints: 1) Show your calculations in detail 2) Your Elasticity result should be a negative number-otherwise you are using a positively sloping demand! 3) The calculation is more involved than finding which 4 numbers from the table to stick into the formula. There is a "natural" growth in demand that has to be calculated and taken into consideration when determining the effect of the price change upon the quantity demanded.]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 $9.99 per month. Netflix began notifying customers in April that the price increase would become effective in the second quarter.Netflix was trying to implement price increases more slowly after a 2011 increase led to negative publicity and a customer backlash. In that case, Netflix separated its streaming and DVD services, and charged separately for both services.However, regardless of the implementation of the price increase, the higher monthly prices seem to have impacted the growth of membership among US subscribers. In the two quarters before the price increase, Netflix added net membership of 1.6 million and 2.2 million members. By contrast, the number of members added in Q2 was only 160,000, and in Q3 only 400,000. The Q2 growth in US subscribers was the lowest since Netflix began reporting those numbers in 2012. US Streaming (millions)Q2 2015Q3 2015Q4 2015Q1 2016Q2 2016Q3 2016Revenue102610641106116112081304Contribution Profit340344379413414475Contribution Margin33.1%32.3%34.3%35.6%34.3%36.4%Paid Memberships41.142.143.445.746.046.5Total Memberships42.343.244.747.047.147.5Net Additions0.900.881.562.230.160.40 Monthly Revenue per Paid Member$ 8.33$ 8.43$ 8.49$ 8.47$ 8.75$ 9.40Percentage 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 According to a MarketWatch article 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 "churn." Netflix did not flat-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 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.

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