How Netflix Handled This Price Hike Right
It looks like Netflix (NASDAQ:NFLX) has learned its lesson. On Friday, the company raised the price for new subscribers to its streaming video service from $7.99 to $8.99 per month. Existing customers have their price of $7.99 locked in for two years. Wouldn’t you know it, no one seems to be complaining.
The reason this is notable is because of what happened last time it raised its prices. Back in 2011, subscribers paid $9.99 per month to watch streaming video and receive DVDs in the mail. Then the company decided to split the two services and charge $7.99 for each. That meant that if you wanted to maintain your access to their DVD rental and streaming services, you had to pay $16 per month, which amounted to a 60 percent price increase. New subscribers had to pay the new price immediately, but existing subscribers got a two-month window of paying the same amount.
Customers were not happy and were very vocal. A 60 percent price increase was too much for many subscribers, leading some people to drop one service, and many others to drop Netflix altogether.
To make matters worse, Netflix also planned to rebrand its DVD rental service under the name Qwikster. The idea was to make Qwikster a completely separate company from Netflix, which would mean it’d have two separate websites and two separate subscription platforms. Customers to both services would have had to maintain two watch lists, two profiles, and two sets of movie ratings in order to keep their accounts in sync. All the while, apparently no one at Netflix had checked the availability of the @qwikster Twitter handle, which belonged to an often-unintelligible, pot-smoking teenager.
The whole idea was very ill-conceived, causing investors to abandon ship in droves. Netflix’s stock quickly took a downturn, going from nearly $300 per share down to around $60 in four months.
A few weeks later, Netflix CEO Reed Hastings wrote a blog post retracting some of the changes. “It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs. This means no change: one website, one account, one password … in other words, no Qwikster.”
The turnaround worked, but it took a long time for Netflix to regain the trust of its detractors and for the stock price to get back to its previous high. It certainly helped that it didn’t have any other major shake-ups, and were able to generate lots of buzz around their original programming, like House of Cards and Orange Is the New Black. It also probably helped that it didn’t raise its prices again until just now.
So what did it do differently with this price increase? Just about everything. First, Hastings announced the price increase last month, giving customers time to get used to the idea. He also assured customers that the price would only go up a dollar or two per month — a far cry from the 60 percent increase customers saw in 2011. Since he had prepared customers for a possible increase of two dollars a month, the actual increase of one dollar doesn’t seem so bad. The kicker is that the company locked in the cheaper rate for existing customers for two years.
In short, we’re looking at a company that made a giant misstep three years ago, but learned its lesson and won’t repeat the same mistake.