When Netflix announced their price increase last year, there were a lot of doubters. Many people, including investors, believed that the rate hike could lead to existing customers leaving the service. They also believed that a higher price would actually incentivize new customers to opt for other services, such as Amazon Prime Instant Video or Hulu Plus.
As it turns out, Netflix was right and critics were wrong. Customers are often willing to pay a slightly higher price for a higher quality product or service. In fact, customers are willing to pay a higher price for a product or service of equal or lesser quality so long as they believe the product is superior. Starbucks learned this lesson themselves when increasing their prices last year.
The thing that is important here is that premium brands, either in reality or in perception, enjoy certain privileges in pricing. For a company in this position, it is insane for them to not exercise that privilege. A great example of a company taking advantage of their marketing position is Apple, who has always charged far above market value for fairly pedestrian products. If customers didn't believe that Apple offered a premium product they could never get away with their pricing model.
Because of the new pricing from Netflix, they saw an incredible fourth quarter. Their profit margin rose a full point to 13%, with revenue growing 35% year-over-year. This growth comes during a year in which new costs arose, including Comcast charging for direct access, and a rollout of Super HD to everyone. Netflix has also spent money on a new slew of original programming, making it a more attractive option than its competitors, whose original programming is in less quantity than Netflix.
Were you offended by the price increase, or did you accept it because of the content available on the service? Let us know in the comments.
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