Wednesday, April 6, 2016

Will Netflix Price Increase Lead to a Little Churn, or a Lot?

Consumers cannot always be relied upon to behave as they say they will. They often do what they say they will not and fail to do what they say they will do. The old joke about “do you watch public broadcasting?” Provides an example.

The percentage of people who say they do so rarely matches the Nielsen and other viewing data.

That has business implications. Some would argue that “consumer opinions” therefore are not a reliable predictor of ultimate behavior. Few companies ever were as as committed to that principle as Apple under Steve Jobs.

"We do no market research. We don't hire consultants,” Jobs said. That perhaps highly unusual attitude was motivated by the idea that consumers cannot give you reliable feedback about products they never have seen and used.

In other cases, such as consumer opinions about linear video service, even when there arguably are alternatives, far fewer consumers switch providers than say they will switch.

One sees the same pattern in consumer mobile service, as expressed dissatisfaction is much higher than actual churn behavior. Often, attitudes do not match behavior.

We might see a similar development as price increases for Netflix standard streaming plans of $2 per month are coming in May 2016.

About 17 million consumers will see the price hikes analysts at UBS have estimated.

Predictably, 41 percent of respondents to a UBS survey said they would accept no price increase for Netflix. Recall that similar questions about price increases for linear TV have shown opposition to paying “any increase at all” for the service as high as 68 percent of respondents, UBS notes.

Despite those attitudes, linear TV subscription costs have been rising three percent to five percent annually every year, while only about one percent of consumers actually desert.

Steaming service churn, however, is normally quite high in “normal” times. Some researchers have found annual churn for Hulu Plus to near 50 percent annually. Netflix, on the other hand, has relatively low churn, perhaps 10 percent annually.

Will churn rates climb, at least initially? Probably. The issue is by how much.

UBS estimates three to four percent of customers facing the $2 a month increase will cancel service.

One reason: Netflix costs nine cents per hour of viewing. Linear video costs 30 cents per hour, according to UBS.

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