image from digitaltrends.com by Kayleigh Yerdon, Summer Intern 2015, Cornell University
Picture this: You go home after a long day. You make yourself some dinner and then stretch out on the couch. You might read a book for a little bit until your eyes get heavy, or… like many of us, you might go straight to Netflix.
This is not an uncommon scene. Even if you’re not an “every night” kind of Netflix user, chances are you sit down with your family, friends, or snacks and use the online video steaming service to watch your shows every so often. In fact, the streaming service was set to reach nearly 82 million domestic and international subscribers by the end of the first quarter of 2016. For a company that has grown so steadily since its formation in 1997, growth can only be expected to continue.
So, why is Netflix the topic of a “Corporate News Spotlight”? It seems like they’ve got it all figured out! Here’s why:
This week, Netflix announced that its “grandfathered” members would start to pay higher rates, beginning in mid-May. The company defines “grandfathered” as users who have been subscribed to the service for two years or more – although American users who are unsure of their initial subscription date can check their account settings to see when their subscriptions will change. Instead of the typical monthly payment of $7.99 that the affected members have paid in the past, rates will be increased an extra $2 per month. Do the math, that’s a grand total of $9.99 each month per subscription – or a 25% price increase per user. For the exact same product.
Think about that! Better yet, it is estimated that only 3 or 4 percent of all members who see price increases (all 17 million of them, mind you) will actually cancel their subscriptions when this policy goes into effect. This move follows a price increase from October of 2015, when the company raised the price of its most popular plan by $1, too. As the previous price hike yielded no slowdown of support for Netflix, it is expected that the price hike for grandfathered members will again produce a positive result. Ultimately, if all of this works out the way Netflix hopes it will, the video streaming service will have 96% of its long-term users paying 25% hiked monthly rates. This doesn’t even include their announcement for further international price hikes to come.
Now the question becomes: would you pay the extra $2? If you’re like most people, you’ve been in the habit of using this service for years and you’re a fan of the product, so you might not mind paying an extra $2 each month.
In my opinion, Netflix just called the biggest bluff of 2016. They saw that their customers would be willing to pay more for the same service and took the leap to call them out. While the move is risky, as “grandfathered” customers are probably used to their usual $7.99 per month charge (and lets face it, nobody likes change), I honestly believe that we could see a skyrocket in Netflix’s profits as an effect of this announcement. This could obviously mean great things for Netflix’s stock price, too!
Of course, we’ll all have to wait and see when Netflix’s plan goes into action in May. Be on the lookout and do your research, wise investors – it doesn’t seem like Netflix is going to “chill” any time soon.