Question

Netflix Price Increase Hurts Membership Netflix experienced some membership turbulence in 2016 as a price increase was phased in for its US subscribers. In May 2014, Netflix announced that the price of its standard subscription service would increase from $8 to $9. However, established customers were allowed to stay at the $7.99 price for two years. In 2015, Netflix increased the standard price to $9.99. As a result of the pricing plan and the deferred price increase, in May, 2016, the standard pricing plan for long time customers of Netflix increased from $7.99 per month to $9.99 per month. Netflix began notifying customers in April that the price increase would become effective in the second quarter. Netflix was trying to implement price increases more slowly after a 2011 increase led to negative publicity and a customer backlash. In that case, Netflix separated its streaming and DVD services, and charged separately for both services. However, regardless of the implementation of the price increase, the higher monthly prices seem to have impacted the growth of membership among US subscribers. In the two quarters before the price increase, Netflix added net membership of 1.6 million and 2.2 million members. By contrast, the number of members added in Q2 was only 160,000, and in Q3 only 400,000. The Q2 growth in US subscribers was the lowest since Netflix began reporting those numbers in 2012. US Streaming (millions) Revenue Contribution Profit Contribution Margin Paid Memberships Total Memberships Net Additions Q2 2015 1026 340 33.1% 41.1 42.3 0.90 Q3 2015 1064 344 32.3% 42.1 432 0.88 04 2015 1106 379 34.3% Q1 2016 1161 413 35.6% 45.7 47.0 2.23 Q2 2016 1208 414 34.3% 46.0 47.1 0.16 Q3 2016 1304 475 36.4% 46.5 47.5 0.40 44.7 1.56 $ 8.33 $ $ $ $ $ Monthly Revenue per Paid Member Percentage Chg. Rev Percentage Che Memberships 8.43 3.7% 8.49 3.9% 8.47 5.0% 8.75 40% 9.40 7.9% 2.5% 5.3 0.6% 0.9% Source: Netflix 100 03, 2016

Answer 1

Sol: - 1) percentage change in price is revenue perpaid member in calculated by using data for monthly quarter belove price increases :- May 2016 (ov) , 9016 the price ore increased $8.47 $ 8.15 8.41 @, 2016 QG 2016 0, 2016 Monthly increase $9.40 perpaid member • percentage change in prices - 9.40-844 0.93 . 0-10979 - 8.47 prices increasingly = 10.97"). 2) Average membership growth before the price increases :- * The average membership growth before the price increase was 1.& in year 2007, 1.9 in year 2008, 2.9 in year 2009 * Before netflix increases the membership Price, the average subscriptions till 2010 was about 7.7 million * Subscriber membership nearly 3.1 billion arrived in 4th quarter alone. The company yield in the streaming higher profit more than the Produce of DVD Nel fline expand its subscriber in the Q3 and finance more in the year 2018 around the globe. * Before the price increases, the price of the subscriptions Service was only $ 4.99 to $8 This makes the million of Subscriber growth during before the 40 e the price increases the net additions of the subscriber in AQwas 0.90 but it decreases +0 0.88 in the e But the total average membership Subscribey were increase to 42.3 to 43.8. alone in Qq and Q3. 39 It growth rate would have stayed the same, no of Subscribers nettlixe ve have expected to add in and and 3d Quarter of 2016 if not allow price of increase :- Q, 2016 Qg 2016 0 32016 Actual total membership 47.0 47.1 47.5 2.23 0.16 0.40 Net additions Expected total membership 47+ 3-55(47) 100 41 +1.6685 48 66 + 3.55(4866) 100 = 48.66 + 1 Yy4 = 50.38 = 48.6685

Expected net additions 1.66 1.79 1.66 -0.16 1,92-0.40 Ce 1.32 1055 in subscribers (expected net additions- Actual net additions) .7. change in relative to Subscribers in Q, 2016 - 1.32 x 100 EI SOX100 47 = 2.80 1. - 3.1907 A) own price elasticity of demand using percentage change in the price and subscriberships :- 032016 Q,2016 A4.0 02 2016 47-13 Total membership 44-5 $8.44 $8.45 totes $9.40 Monthly Revenue per Paid member 4.48:1. 50 2 t 3.30). -). change in monthly Exevenue 7 paid membership bership 460 465 45.700 45.7 CE en 2 020 -65.), 1.08.1. j. change in paid membership * own price elasticity of demand ). in members x price y.in prices member = 0.65 930 x 8.15 46 * own price elasticity of demand = 0.03746 - 1.08 x 9.40 . 9.42 46.5 - 10:152 345.03 = 0.029 5) Due 10 revenue change ise- price increases Netflix After increasing in the price in Subscriber Service to $940 $9.99 there is a possibility to double up the average profit margin of the revenue. AS in price of Subscriber increases the average membership Subscribey 2016 mg - 47.1 increases to 49.5 in 2016 Q2