It isn't a big deal that Netflix recently raised its monthly subscription cost from $7.99 to $8.99 — especially since current subscribers will be locked into the $7.99 fee for the next two years. But would you pay as high as $15 per month? That’s how much the leading online video provider could charge without a mass exodus, said two researches who survey customer attitudes. But Netflix's fee is unlikely to exceed $15, unless it drastically changes what it's offering and becomes a genuine cable replacement.
Tom's Guide spoke with Mark Kirstein, president of the entertainment group at research firm NPD Group, and Jonathan Hurd, director of the Altman Vilandrie & Company consulting firm, to learn how high Netflix could go.
"[Netflix] has the highest value for price rating of all digital rental and purchase options," Kirstein explained. Consumers are unusually enthusiastic about Netflix and its brethren, like Hulu Plus and Amazon Instant Video. (Amazon recently raised the price of its Prime video service by $20 to $99 per year.) About 78 percent of consumers rate their value at "very good" or "excellent" based on the price, compared with about 40 to 50 percent satisfaction for traditional physical media, such as DVD rentals and purchases.
This helps explain why, based on the general reaction of Internet users so far, Netflix customers are not too miffed about the $1 price increase. Even leaving aside their next two years at $7.99, viewers love Netflix and believe that it provides a lot of value for their money. That means that Netflix could, in theory, raise its prices more without prompting too much customer ire, but there are two important reasons why it wouldn’t.
"One is the absolute price consumers think is a good value," Kirstein said. Consumers have some baseline idea of what a streaming service should cost, and how much content it should provide. The second, he continued, is what viewers are used to paying. "Even if they think it's a great value for the price, they're going to resist price increases."
The Qwikster Lesson
Netflix already tried this, Kirstein explained, with its Qwikster debacle of September 2011. Netflix split its service into two formats: Netflix for online streaming, and Qwikster for DVD-by-mail rentals. Consumers resisted having to split their accounts and pay two fees instead of just one. Qwikster itself died a quick and ignominious death, but consumer ill will for separate streaming and DVD rental fees remained.
Even so, Netflix has repaired its reputation since then; its 78 percent satisfaction rate today is up from an already-high 70 percent in 2012, Kirstein pointed out.
Customers are unusually happy with Netflix and are generally getting happier. That would allow Netflix to raise prices, but only so high. "They'd maximize their revenue somewhere in the range of $25 to $29 per month," Jonathan Hurd explained, although he said this would be a terrible idea on Netflix's part because it would cut subscribers by about half. "Netflix needs to grow its subscriber base in order to afford the investment they're making in original content and licensing content," he said.
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Hurd further explained that while Netflix could raise prices again, it's not likely to do so anytime in the near future. The $8.99 price point is essentially a risk-free way to evaluate how much people are willing to pay for the service, since existing subscribers are grandfathered into the $7.99 price.
Could Netflix replace cable?
Why people subscribe to Netflix also plays a role in determining how much they're willing to pay for it, said Kirstein. For most people, having Netflix is like having HBO: a pleasant extra, but not the backbone of their TV-watching experience. Once the monthly fee gets beyond $15, people would expect it to be a comprehensive basic cable replacement, complete with live TV and more original programming.
"The ultimate price point depends on how much value you can continue to add to the service to get recognized by the consumer as worth the money," Kirstein said. "[Netflix is] not, for the foreseeable future, going to pose a serious threat to [traditional] paid TV services."
"While Netflix is far and away the leader in terms of [streaming services], it's hard to say what the market landscape will look like in a few years," said Hurd. "In this market, two years is a long time."