Netflix Pricing Model Reinforces New Strategy

by Patrick Lefler

Netflix Pricing Model Reinforces New StrategyNetflix, which has already conquered Blockbuster in the DVD-rental business, is now focusing its resources on winning online video services. In an announcement yesterday, Netflix CEO Reed Hastings pretty much spelled out their strategy going forward:

“We are now primarily a streaming-video company delivering a wide selection of TV shows and films over the Internet.”

And the primary method for Netflix to accomplish this new strategy–a switch from providing both DVD-rental and online video streaming services to focusing solely on TV and movie video streaming–is through a pricing model change.

Netflix announced that they are splitting their pricing model into two options – one that continues their old model where customers get unlimited streaming along with DVD-rentals, and adding a new option where customers get unlimited movie streaming without the option of DVD-rental. The unlimited streaming only option–which is clearly Netflix’s preferred method of delivering TV shows and movies– will now cost $7.99 per month. The unlimited streaming with DVD-rental will now cost anywhere between $9.99 to $41.99 per month depending on the amount of DVDs rented. The old pricing model started at $9.99 per month and up so the new streaming only option represents a $2.00 monthly decrease.

According to the Wall Street Journal:

“The new service and the DVD price increases indicate the company wants to foster use of online streaming and discourage use of the by-mail rentals.

Netflix has said the costs of distributing DVDs–including the roughly $600 million it will pay to the U.S. Postal Service in 2010–can ultimately be diverted into paying for content rights for online streaming.

Netflix’s embrace of online streaming could bolster the company’s ability to provide a low-cost alternative to traditional cable- or satellite-TV subscriptions and to compete with other online video services, like Hulu LLC. Last week, Hulu said it subscription service, Hulu Plus, will now cost $7.99, down from the $9.99 price it adopted when its trial of the service began in June.”

With by-mail rental competitor Blockbuster weakened because they are currently in bankruptcy proceedings, Netflix should be able to raise prices on the DVD rental part of the business which will extract more revenue from that part of the business even as it shifts it focus to online streaming. Sounds like a great strategy.

Here’s the takeaway. While pricing theorists like to only think about the price versus value argument, Netflix shows how pricing can also be used to help successfully execute strategy changes. And if Netflix eventually comes out as the winner, who do you think loses the most because of the strategy change? If you answered the U.S. Postal Service, then you’re right! The Post Office will see a significant decline in Netflix revenue over the next few years from its current $600 million for 2010.

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Patrick LeflerPatrick Lefler is the founder of The Spruance Group – a management consultancy that helps growing companies grow faster. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.

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