Harvard Case - Netflix: Pricing Decision 2011
"Netflix: Pricing Decision 2011" Harvard business case study is written by David Robinson, Max Oltersdorf. It deals with the challenges in the field of Marketing. The case study is 13 page(s) long and it was first published on : Jan 20, 2013
At Fern Fort University, we recommend Netflix implement a tiered pricing strategy based on streaming quality and content availability. This strategy would offer consumers a choice between different subscription tiers, each with varying levels of features and benefits. This approach balances the need to increase revenue with maintaining customer satisfaction and fostering continued growth.
2. Background
Netflix, a pioneer in online streaming, faced a critical decision in 2011. Their subscription model, offering unlimited streaming for a fixed monthly fee, was under pressure. Rising content costs and increasing competition from established players like cable companies and emerging services like Hulu threatened their business model.
The case study focuses on Reed Hastings, Netflix CEO, and his team's dilemma. They needed to find a way to increase revenue while maintaining their subscriber base and competitive edge.
3. Analysis of the Case Study
To analyze Netflix's situation, we utilize a combination of frameworks:
1. SWOT Analysis:
- Strengths: Strong brand recognition, vast content library, innovative technology, strong customer base, data-driven approach.
- Weaknesses: High content costs, increasing competition, potential for customer churn with price increases.
- Opportunities: Expanding into new markets, developing original content, leveraging data analytics for personalized recommendations.
- Threats: Piracy, declining DVD rental market, increasing competition from established players and new entrants.
2. Porter's Five Forces:
- Threat of New Entrants: High, due to the low barriers to entry in the streaming market.
- Bargaining Power of Buyers: High, as consumers have many alternatives and can easily switch services.
- Bargaining Power of Suppliers: High, as content providers have significant leverage due to the high demand for their content.
- Threat of Substitute Products: High, as consumers can access content through various channels like cable TV, free streaming services, and piracy.
- Rivalry Among Existing Competitors: High, as the streaming market is becoming increasingly crowded with new entrants and established players expanding their offerings.
3. Consumer Behavior Analysis:
Netflix's customer base is diverse, with varying needs and preferences. Some value a wide selection of content, while others prioritize high-quality streaming and exclusive content. Understanding this segmentation is crucial for developing a successful pricing strategy.
4. Competitive Analysis:
Netflix faces competition from various players, including cable companies, traditional media networks, and other streaming services. Each competitor offers different content libraries, pricing models, and features. Understanding their strengths and weaknesses is crucial for positioning Netflix effectively.
4. Recommendations
Netflix should implement a tiered pricing strategy with three distinct tiers:
1. Basic Tier: This tier would offer access to a core library of popular content, standard streaming quality (SD), and limited simultaneous streams. This tier would be priced at a lower rate to attract price-sensitive customers and expand the reach of the service.
2. Standard Tier: This tier would offer access to a wider selection of content, including recent releases and popular shows, with higher streaming quality (HD) and more simultaneous streams. This tier would be priced at a mid-range rate to cater to the majority of Netflix's existing subscribers.
3. Premium Tier: This tier would offer access to the entire Netflix library, including exclusive content, 4K Ultra HD streaming, and unlimited simultaneous streams. This tier would be priced at a premium rate to cater to high-value customers who prioritize quality and features.
Implementation Timeline:
- Q1 2012: Announce the tiered pricing strategy and begin marketing the new tiers to existing and potential subscribers.
- Q2 2012: Launch the new tiers and provide existing subscribers with the option to choose their preferred tier.
- Q3 2012: Monitor customer response and adjust pricing and content offerings based on data and feedback.
5. Basis of Recommendations
This recommendation considers the following factors:
- Core Competencies and Consistency with Mission: The tiered pricing strategy aligns with Netflix's core competency in providing high-quality streaming services and its mission to offer a diverse and engaging content library.
- External Customers and Internal Clients: This strategy caters to the diverse needs of Netflix's customer base by offering different tiers with varying features and benefits. It also allows Netflix to better monetize its content library and resources.
- Competitors: The tiered pricing strategy allows Netflix to compete effectively with other streaming services by offering a range of price points and value propositions.
- Attractiveness: The tiered pricing strategy is expected to increase revenue and profitability by expanding the customer base and capturing higher-value customers.
6. Conclusion
By implementing a tiered pricing strategy, Netflix can address its revenue challenges while maintaining its customer base and competitive edge. This approach allows Netflix to cater to diverse customer segments, increase revenue, and continue its growth trajectory in the evolving streaming landscape.
7. Discussion
Alternatives:
- Single-tier pricing with price increase: This option would be simpler to implement but could lead to customer churn and potentially damage brand image.
- Content-based pricing: This option could be complex to manage and might not be appealing to all customers.
Risks and Key Assumptions:
- Customer churn: Some customers might be dissatisfied with the new pricing structure and choose to cancel their subscriptions.
- Competition: Competitors might react to Netflix's pricing strategy by adjusting their own pricing or offering new features.
- Content costs: The cost of acquiring and producing content might continue to rise, impacting profitability.
8. Next Steps
- Develop detailed pricing plans for each tier.
- Create marketing materials and campaigns to promote the new tiers.
- Implement a customer communication strategy to inform existing subscribers about the changes.
- Monitor customer response and adjust pricing and content offerings as needed.
This tiered pricing strategy provides Netflix with a flexible and adaptable solution to navigate the evolving streaming landscape. By understanding its customers, competitors, and market dynamics, Netflix can leverage this strategy to achieve sustainable growth and maintain its position as a leading streaming service.
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Case Description
Beginning in 2007, Netflix began offering existing mail rental subscribers the opportunity to view a limited number of movies through internet streaming and no additional fee. This "free streaming" continued until mid-2011 when Netflix announced a split to their business with separate monthly fees (and separate websites and names) for streaming and mail disk subscriptions. The resulting customer backlash and threatened defections caused the company's stock price to drop 60 percent. As movie studios (the owners of the content) saw sales of DVDs drop, they began to sharply raise their prices for online content. Moreover, Netflix which had been dominant in the mail disk rental model began to face substantial competition from other streaming video providers. The case study provides students with an opportunity learn about pricing and to develop a pricing strategy for Netflix.
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