Thursday, May 8, 2014

Will Netflix, Amazon Prime Price Hikes Do Lasting Damage?

Will Netflix and Amazon Prime find planned subscription price hikes have long-term negative impact? Though there might be near term impact, there is reason to believe there will no significant long term impact on subscriber growth or perceptions of value.

The reason is past Netflix experience with significant price hikes, as well as most history of price hikes in the subscription video business.

To be sure, subscription service price hikes often are troublesome in markets where there is significant competition, since customer defection is a possibility.

But there are cases where price hikes, even annual and significant price hikes, do not seem to do much damage to take rates.

Subscription TV has proven to be such a market, at least until quite recently. Despite virtually annual price increases that outstrip general inflation rates, the overall linear video subscription business had grown virtually without a dip until 2013 or so, when overall subscriptions dipped for the first time, ever.

Many would argue future price hikes will occur in a different business context, though, where the business is flat to shrinking, and with competitive offerings gaining subscribers as well. And one might well argue that the online video entertainment business is at a very early stage.

That might bear a greater resemblance to the earlier days of cable TV, allowing a situation where adoption keeps growing despite price increases.

And Netflix will over the next year or two find out what higher prices do for take rates and churn, much as Amazon will find out what price hikes for Amazon Prime do for take rates and churn.

To be sure, consumers might suggest there is some danger of churn. In a recent survey, 14 percent of Netflix consumers who use the streaming service said they would cancel their subscriptions if the monthly price climbed by $2.

The YouGov survey also found that if prices were hiked by $1 a month, just six percent of Netflix streaming customers reported they would cancel their subscriptions.

But consumers often do not act as they indicate they will. Just as often, consumers say they will not do something, and do.

That sort of disconnect might be more common when surveys deal with behaviors and attitudes. But the danger of misleading survey results is rather common, even for most commercial products.

Perhaps the biggest problem area is the accuracy of end user remarks about potential future behavior. Quite often, the reported expected behavior does not materialize.

There are two other areas of concern. Consumer surveys often are inaccurate when used to ascertain why consumers behave in certain ways, or might behave in certain ways. That limits ability to shape promotional strategies, for example.

Also, end user surveys relying on self-reported reasons for past behavior can err, as the actual reasons consumers made a purchase decision might later be described in other ways.

Such error can occur especially when asking “how much would you pay” for a proposed product.
When asked, consumers often will choose the lowest price. But actual buying behavior is a mix of perceived value, product quality and features, in relation to a specific price.

That is tough to capture is a survey.

Also as Steve Jobs, Apple CEO noted, consumers have no way of evaluating the value of a product they never have seen.

Netflix and Amazon won’t face that sort of problem. Consumers generally understand the product and the value. What remains uncertain is possible falloff from current users who deem price increases out of proportion to value.

Amazon has hiked Amazon Prime prices about 25 percent, as did Netflix several years ago, for new customers. That lead to significant customer churn for Netflix, at least temporarily. But subscriber growth continued, after the hiccup.

Amazon is gambling a similar hiccup might occur, but would quickly prove to be a temporary phenomenon.

Netflix ran into a huge problem when it repriced its services to emphasize streaming delivery in 2011, losing about a million subscribers after the 2011 pricing change was announced.

In that move, Netflix eliminated a popular “DVD plus streaming” plan costing about $10 a month, in favor of separate DVD rental and streaming plans each priced at about $8 a month. That might have represented a 60-percent price hike for consumers who wanted DVD and streaming access.

This time around, Netflix will apply the higher charges only to new customers, grandfathering existing users for perhaps a year or two.

And Netflix is not talking about potential 60 percent price hikes, but something more on the order of 13 percent or 25 percent, on a base of $8 a month or $16 a month.

That earlier experience might suggest why Netflix believes a price increase of one or two dollars, applied only to new customers initially, and to all customers eventually, will not be detrimental.

Though Netflix took an immediate hit of about a million customers in the wake of the big packaging change in 2011, net customer additions have recovered to the point that the long-term impact seems nil to non-existent.

In its first quarter of 2014, Netflix added four million net new streaming subscribers, up from about three million steaming customers, year over year.

Netflix gained 2.25 million net new U.S. subscribers and 1.75 million international subscribers, for a total of 48 million global members, including 35.7 million in the United States.

IN 2013, about 30 million of those customers bought streaming plans, compared to about 7.5 million customers on DVD rental plans.

But Netflix is growing, arguably a result of providing a reasonable price-value relationship, and plans what might be considered modest price increases.

As a rule of thumb, raising prices for a product people want will tend to depress volumes purchased.

But consumer appetite for video entertainment tends to suggest value is high enough, in most cases, to overcome price resistance.

At least, that is what one historically would have predicted, given virtually annual price increases for cable TV, satellite TV and telco TV subscriptions.

Netflix and Amazon Prime might find similar results, this time around.

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