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KU Jour 820 - A review of Netflix's recent price change, the rationale behind it and the communications around it.
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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”