The Netflix logo
Netflix Inc. is an online video rental and movie streaming company based out of the United States^1. In fact, it is the largest company in the online media streaming industry with over 8 million subscribers worldwide^2.
Due to Netflix’s international success, it has decided to make dramatic price increases (as much as 60%). This choice is really testing the company’s customer loyalty and price elasticity^3. Which raises an interesting question; how will Netflix’s current customers respond to its increase in prices?
The answer is simple, they will unsubscribe to Netflix. Although it has over 8 million loyal subscribers, there are several substitutes for Netflix. For example, video rental stores, other online media companies, Video on Demand, etc. In today’s feeble economy, most people will decide to purchase these options over Netflix to save money. Therefore, Netflix has a large price elasticity because their will be a decrease in demand for it when it’s prices increase. In other words, an increase in price results in a decrease in demand. As a result, Netflix’s rise in rates will likely result in a considerable loss in its clientele.
Footnotes:
^1- Netflix: Overview, http://ir.netflix.com/
^2-Netflix-Company Information, http://venturebeatprofiles.com/company/profile/netflix
^3- Rob Frieden, Netflix Tests Subscribers Price Elasticity and Loyalty, http://telefrieden.blogspot.com/2011/07/netflix-tests-subscribers-price.html
Obviously, somebody doesn’t understand the difference between price elasticity and the relationship between price and quantity demanded. As price increases, it is true that quantity will decrease, however this does not mean that revenue will decrease. The effects of the price increase on revenue will depend on the relative size of the price increase compared to the relative size of the decrease in number of subs (I.e. if percent decrease in subs is less than percent increase in price, Netflix revenues will increase).