KU Jour 820 – Marketing Fundamentals

What’s the Buzz – Pricing Strategies – Nov. 9, 2011

Danny Kim and Peggy Lim

Netflix Videos

• Video of Reed Hastings (713 likes; 5,000 dislikes) http://youtu.be/c8Tn8n5CIPk

• Conan Video: http://youtu.be/s4d-di_n3QE

• South Park "I'm Sorry" spoof

• Hitler spoof (1:28 min – 2 min): http://youtu.be/EpKGHOvqsFc

Video Quiz:

• Do you use Redbox?

• Do you use Netflix? For DVDs? For streaming?

• Did you cancel your subscription after the Netflix price hike?

Netflix Price Increase: Play by Play

• Jul. 12, 2011 announced ~ 60% price hike:– From $9.99 for unlimited

streaming + 1 DVD-at-a-time– To $7.99 for streaming + $7.99

for 1 DVD-at-a-time – Effective Sept. 1, 2011– Announced via email, blog and

social media

• Reaction / Backlash– 5000 comments on blog– Heated discussion on

Facebook and TwitterHitler spoof: http://youtu.be/EpKGHOvqsFc

Netflix Price Increase: Play by Play

• Sept. 18, 2011 CEO Reed Hastings apology– “I messed up.” – “Companies … die from

moving too slowly.” (e.g. Borders and AOL)

– DVDs by mail would become “Qwikster”

– Separate websites

http://blog.netflix.com/2011/09/explanation-and-some-reflections.html http://blog.netflix.com/2011/10/dvds-will-be-staying-at-netflixcom.html

“Streaming and DVD by mail are two different businesses… we need to let each grow and operate independently.”

• Oct 10: Nevermind, No Qwikster – “DVDs will be staying at

netflix.com”

South Park "I'm Sorry" spoof

Netflix Price Increase: Play by Play

Stock prices fell about 74 percent in value from $300 per share from July 13, 2011 to $77.37 on October 25, 2011.

Source: “Netflix Business Opportunity: Some Background for Candidates,” Reed Hastings Slideshare PowerPoint http://www.slideshare.net/reed2001/netflix-business-opportunity-5854575

Source: “Netflix Business Opportunity: Some Background for Candidates,” Reed Hastings Slideshare PowerPoint http://www.slideshare.net/reed2001/netflix-business-opportunity-5854575

6 Steps for Setting a Pricing Policy

1. Selecting a pricing objective

2. Determining demand

3. Estimating costs

4. Analyzing competitor costs, prices and offers

5. Selecting a pricing model

6. Selecting the final price

Step 1: Select a Pricing Objective

• Survival

• Maximum current profit

• Maximum market share

• Maximum market skimming

• Product quality leadership

• Other

Step 1: Select a Pricing Objective

• Survival (As mature DVD industry wanes)

• Maximum current profit• Maximum market share (Global expansion)

• Maximum market skimming• Product quality leadership (Gain edge)

• Other

Step 2: Determine Demand

Sources: 2011 Pearson Education, Inc., Q3 2011 Netflix Letter to Shareholders 

• About 810,000 subscribers cancelled the service.• Loss: About 3 percent of Netflix’s 23.8 million subscribers.• But 97 percent stayed. And Q3 ‘11 revenue was up 44% YOY, while unique subscribers was up 42% YOY.

- 66%- 5%

Elastic or

Inelastic?

Step 3: Estimate Costs

DVD Costs• Little fixed cost. • In U.S., buy DVD

once; rent as long as want.

• Almost all variable cost: postage, labor.

• Cash cow • Long-term residual

market; years of decline

Streaming Costs• Fixed cost: licenses.• Added $1.3 billion in

content assets in ’11• Lower variable costs• 8% margins• Competitors will

shape long-term margins

Sources: 2011 Pearson Education, Inc., Q3 2011 Netflix Earnings Conference Call

Step 4: Analyze Competitor Costs, Prices and Offers

• User-generated• News • Sports • TV shows

• Movies• Music videos• Adult / porn• Instructional

• To have profitable growth in such a large market, Netflix must find a segment in which it can gain and maintain leadership.

• Netflix’s segment: consumer-paid streaming subscription of TV shows and movies.

Source: “Netflix Business Opportunity: Some Background for Candidates”

Step 4: Analyze Competitor Costs, Prices and Offers

• Free advertiser-paid (YouTube, Hulu, ABC)– FREE. Bigger threat if Google improves ad targeting. (Pirated, too.)

• Consumer-paid (Hulu+, Amazon Prime)– $7.99 / month Hulu+ for current season, less prior season stuff– $79/yr - Free w/ Amazon Prime, small fraction of Netflix titles

• Pay-per-view (Apple, Amazon, Vudu, etc.)– $0.99-$3.99 / movie on Amazon to rent; newer releases– $2.99-$4.99 / movie to rent on Apple iTunes; $9.99-$14.99 to buy – $0.99-$5.99 on Vudu to rent films. $1.99-$2.99/ TV episode

• Cable / Telco / Satellite (HBO, Dish, DirecTV, etc.)– $60 / month for cable package (includes $15 HBO add-on)– Netflix advantage: unbundled, on-demand, large catalog, cost

Step 4: Analyze Competitor Costs, Prices and Offers

• Global Expansion– Why? Video is global– 80% of YouTube

users not in U.S.

• Approach: – $8 unlimited

streaming everywhere

• Canada: In 1 year, 1 mn subs., 10% penetration

• Latin America: Sept ’11 launched in 43 countries

• UK & Ireland in Q1 ’12 – Sky Movies £16 ($25/mo)

+ £12 ($19) BBC license fee, 4.5 mn subscribers

– Lovefilm, DVDs, £12 ($19), 1 mn subscribers

– Debit/credit card users; low piracy; broadband

Source: “Netflix Business Opportunity”

Step 5: Select a Pricing Method

Value pricing: Win loyal customers by charging a fairly low price for a high-quality offering

Break even volume: Fixed Cost / (Price – Variable Cost)

Sources: 2011 Pearson Education, Inc.

Step 6: Select the Final Price1. Set the Price

2. Communicate the Price (Increase)

3. Add value: “No grand gestures, just amazing service day-after-day, for an incredibly low price.”

Do:• Unbundle • Give people a head’s

up about the change

Don’t• Make sudden increases

without perceived benefits

Sources: Q3 2011 Netflix Letter to Shareholders 

Source: “Netflix Business Opportunity: Some Background for Candidates”

Questions & Answers

Video Timeline: 1970s to present

• VHS dominates the 1970s, ’80s, ’90s; Blockbuster founded in 1985

• DVD and Netflix arrive in 1997

• RedBox begins to roll out in 2004 (then with McDonalds; now with Coinstar)

• Blockbuster goes bankrupt in 2010, Dish Network acquires it in 2011

Step 3: Estimate Costs

Source: “Netflix Business Opportunity: Some Background for Candidates”

“Virtuous Cycle”