A look at Netflix’s recent price increase

By: Jayson Derrick
Jayson Derrick
Jayson lives in Montreal with his wife and daughter, loves watching hockey, and is on a lifelong quest to… read more.
on Oct 31, 2020
  • Netflix announced a price increase on Thursday that sent shares higher.
  • Netflix acknowledged the price increase comes at a time of heightened competition.
  • Multipl experts expect more price increases to come over the years.

Streaming video giant Netflix Inc (NASDAQ: NFLX) announced on Thursday it will raise prices for U.S. customers and investors cheered the announcement. 

Price increase details

Netflix’s standard subscription plan increases by $1 a month to $14 and its premium subscription plan goes up by $2 to $18 a month. However, the basic plan stays the same at $9 a month.

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Netflix said in a statement obtained by CNN Bussines that it acknowledges the price increase comes at a time when consumers have “more entertainment choices than ever.” But the streaming video giant is committed to providing an “even better experience” for its subscriber base.

The statement added that the price increase will translate to more variety of TV shows and films for customers. Since the basic membership price remains unchanged, consumers still have multiple options at different price points.

Analyst: Bound to happen

Rosenblatt Securities analyst Bernie McTernan told CNN Business that a price increase was all but a certainty. The only unknown was when it would happen.

Netflix could be operating under the assumption its price increase reinforces the value of the service and content library at a time when the COVID-19 pandemic disrupted content production, the analyst also said.

The company itself acknowledged during its earnings conference call one week ago that it will “occasionally go back” and ask customers to “pay a little bit more” to ensure a consistent addition of new content.

More price increases to come

According to CNBC, Netflix customers should expect annual price increases moving forward. Investors shouldn’t find this concerning as the company’s pricing power means the stock can command a hefty premium.

Most notably, Netflix’s stock has a market cap of $218 billion but generated just $2.8 billion of net income over the past year.

Netflix is also hiking its price from a position of strength as its churn is near 2% which is notably below those of many of its peers. The company has succeeded over the years in convincing customers they are getting great value and should be able to continue doing so moving forward.

Put in perspective, Netflix’s high-end price of $17.99 is notably below an average TV bill of around $100 a month, according to CNBC. Netflix’s library is identical to TV except for live events, news, and sports. 

As such, Netflix has a clear path to continuously increase its price, and even at $25 a month it is still a fraction of the cost of a TV bundle. Netflix has consistently fought against the idea of including live events although this may change over the years.

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