Netflix is raising its prices for some subscribers, testing the elasticity of demand for the service. Investors reacted positively. So far, subscribers have tolerated price increases on the basis that the subscription video service appears to offer good value compared to alternatives. How long will it be before customers are complaining about the cost of their Netflix subscription as much as their cable bill?
In the United States, Netflix is raising its $9.99 a month plan above that psychological price point to $10.99, while its $11.99 a month plan goes up to $13.99. The entry-level $7.99 standard definition offer will stay the same, anchoring the perception of value.
Monthly subscription fees in the United Kingdom will rise from £7.49 to £7.99 and from £8.99 to £9.99, while the entry-level option remains at £5.99. There are similar increases in prices in euro for European markets.
Netflix customers can be rather price sensitive but the company is tackling that head on. In an announcement to customers, it said: “From time to time, Netflix plans and pricing are adjusted as we add more exclusive TV shows and movies, introduce new product features and improve the overall Netflix experience to help members find something great to watch even faster.”
Investors reacted positively, with the stock price rising 8% in a week to approaching $200, having almost doubled in a year, valuing the company at $85.5 billion. In addition, the price rise could generate another half a billion or so dollars in revenue over the next year, according to analysts.
Individual investors love Netflix because it has been making them money, although the company continues to burn cash investing in growth.
Netflix is expected to spend $7 billion on programming in 2018, up from $6 billion in 2017, increasing its spending on original production as other major studios attempt to claw back their titles for their own services.
The company is due to announce its third quarter results on 16 October. It previously forecast a quarterly increase of a million paid members in the United States, to take it to 51.32 million, with an increase of over 4 million internationally, taking its global total to 103.63 million.
The timing of the price rise announcement is unlikely to affect figures for the third quarter. Whether Netflix will continue to justify its valuation in the long term is another matter.