In its first quarter 2014 earnings release yesterday, Netflix announced it is going to increase the price of its standard $7.99 instant streaming service by $1 to $2 sometime before the end of the second quarter of this year.
Is it good news, or bad? Will it work for Netflix or drive customers away in droves?
I think it's going to work very well in Netflix's favor, primarily because of how and when Netflix is going to change its pricing, and because it's still attracting plenty of new customers. Also, as new customers come on, Netflix needs to make sure that it's providing the same quality of service it always has.
One way is by paying cable companies like Comcast, but quality of service alone is becoming tougher, particularly as we move toward higher-resolution videos, which require much more data than ever before. Of course, Netflix knows this, and has already tested the price increase.
In fact, you might not know that this isn't the first time Netflix has successfully increased its prices, and I'll discuss where it has worked in the past in this article.
Ok, enough chit-chat. Let's jump in — here's why the Netflix price hike makes sense.
First, Netflix did the right thing by pushing off the date of its price hike by several months, and by not pushing it on existing consumers (I think it could have, and I'll address that later).
A nice three month buffer between now and the price hike gives any consumer who has been holding out on signing up for Netflix plenty of time to do so at the current more affordable price. Anyone else who signs up after Netflix hikes its prices knows that he or she had the chance to get a better deal.
The company may increase its fee for all existing customers, but promised that it will leave it unchanged for a "generous time period." That may mean a grandfathered-deal for existing customers.
It Worked Before
You might not even know it, but Netflix already increased its prices in one market without seeing any kind of bite back.
In its release yesterday, Netflix said it "saw limited impact from our January price increase for new members in Ireland," where it bumped the cost of service from €6.99 to €7.99. At the time, it let everyone with the old €6.99 plans keep that price for two years.
If Netflix found it worked before, then it should work again, especially if the price hike is comparable to what happened last time.
Netflix Needs to Cover Its Costs
Netflix actually pays to make sure its service performs well for its customers, but that wasn't always the case. In February, the company agreed to start paying Comcast to make sure there's enough bandwidth for its service — allowing customers to receive the Internet speeds required for clear picture and audio, even when Netflix decides to usher out 4K content. Plus, Netflix may be as far as a decade ahead of cable companies when it comes to 4K content.
The firm is now in opposition of the Comcast/Time Warner Cable merger, no doubt because that may increase its costs even further, and it's making sure it's prepared for those future expenses.
That's not all, though. With the increase of original content, Netflix is spending more on making sure it provides top-quality shows for subscribers. Those come in the form of hit series like Orange is the New Black and House of Cards. A new series based on Pablo Escobar is coming this year, too. Netflix is positioning itself to be a viable channel, the likes of HBO.
Additionally, its international expansion has proved expensive, and it expects those costs to continue as it delivers service to new markets. In other words, if you live in a country where Netflix is not available, these price hikes may work in your favor: it's helping Netflix generate the additional capital it will need to continue expanding internationally — where it still isn't profitable.
There's Still Plenty of Growth
It might be somewhat concerning if people were abandoning Netflix in the face of competitors, but that's not the case. It's wise of Netflix to raise costs, and by doing so it will only continue to provide better content and service for the influx of new customers.
Netflix added 2.25 million new domestic customers in Q1 2014, up from the 2 million it added in Q1 2013. It also added 1.75 million new international customers, up from 1.02 million international customer additions in Q1 2013. That shows that customers are still signing up for its service, which means there's demand for what Netflix is putting on the market.
See? It's Good
Netflix isn't out to nickel and dime customers. Most of us who have been subscribing to the service for years already know that. As we saw with the increase in cost for Amazon Prime, price hikes are inevitable as services improve and new features are added.
Netflix needs to do so to help it increase its footprint around the world and in order to continue to provide compelling original content. It also has to brace itself for paying off cable companies like Comcast, which is about to become a whole lot more powerful, to make sure its service is perfect for end users.
Finally, it's increasing the price after a fair and long enough warning to all customers — something that seems agreeable to me.