A lot has been written about the recent announcement by Netflix that they will be increasing their plan prices by as much as 60%. Clearly, this backlash was not unanticipated by Netflix – according to David Pogue:
Netflix knew that there would be a nasty backlash, and has already taken the subscriber defection into account in its financial forecasts. It still figures it will come out ahead.
That’s nice. But in fact, it fits in with the logic behind Netflix’s decision to change its pricing structure:
Last November when we launched our $7.99 unlimited streaming plan, DVDs by mail was treated as a $2 add on to our unlimited streaming plan. At the time, we didn’t anticipate offering DVD only plans. Since then we have realized that there is still a very large continuing demand for DVDs both from our existing members as well as non-members. Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs. Creating an unlimited DVDs by mail plan (no streaming) at our lowest price ever, $7.99, does make sense and will ensure a long life for our DVDs by mail offering. Reflecting our confidence that DVDs by mail is a long-term business for us, we are also establishing a separate and distinct management team solely focused on DVDs by mail, led by Andy Rendich, our Chief Service and Operations Officer and an 11 year veteran of Netflix.
That’s a difficult paragraph to parse, but since I’m well versed in corporate-speak from working at a large corporation, I think I get it. It sounds like Netflix has decided to split its business into two units: online streaming and DVDs by mail. That is what they are explaining by saying that they “have realized that there is still a very large continuing demand for DVDs”. It’s not that Netflix didn’t know this before; they just decided the demand was big enough to justify a new business unit. That’s where the new management team comes in.
The explanation seems to be: we now have two business units and each business unit will charge users independently in order to remain profitable. What Netflix avoids addressing, though, is how this decision affects the current user experience offered by the company.
Here is how we use Netflix at home: stream some older TV shows for casual TV watching, with an occasional movie now and then, and supplement the titles not available for streaming with DVDs. I bet there are lots of other customers who use it exactly the same way.
The key to the service, in other words, is the fact that you can stream and supplement with DVDs when something is not available for streaming. This is what makes Netflix. And this is where the new pricing structure breaks down. It fails to address this special combination that is not offered by anyone else in the business. Take away the DVDs and you’ve got Hulu and Amazon Prime. Take away the streaming and you’ve got Redbox. But put them together and you’ve got Netflix.
To a Netflix customer, streaming and DVDs are inseparable.
To Netflix, they are two separate business units.
It’s a classic case of implementation-model design. The pricing is based on Netflix’s implementation model: DVDs by mail are markedly different from streaming content from a business perspective.
Compare this to a cable company that offers TV, internet, and telephone services. They have separate business units for each, but they still offer bundle pricing if you subscribe to more than one service. Why isn’t Netflix offering the same? This is what doesn’t make sense from the perspective of their users. The service we are receiving doesn’t change, yet the price increases dramatically because of what? Because they decided to have a re-org?
I predict that by the time September 1st rolls around, Netflix will offer a bundle plan for around $12-13/month. In the meantime, customers like myself are left wondering: do I cancel streaming or DVDs by mail? And if I cancel either of those, why not go with the cheaper (or even free) offerings from companies like Hulu, Amazon, or Redbox?
On a final note, here is a hint to Netflix marketing and user experience folks: if the description of your new pricing plan reads like a math problem, you’re doing it wrong.
Your current $11.99 a month membership for unlimited streaming and unlimited DVDs (including Blu-ray access) will be split into 2 distinct plans:
Plan 1: Unlimited Streaming (no DVDs) for $7.99 a month
Plan 2: Unlimited DVDs (including Blu-ray), 1 out at-a-time (no streaming)
for $9.99 a month
Your price for getting both of these plans will be $17.98 a month ($7.99 + $9.99).