Renting and Price
Corey Allen BA504 February 19,2013 Abstract In 1997, Netflix became the first online movie by mail Rental Company. Hastings and Randolph co-founded the company. By 1999, they had come up with a $19. 99 per month price plan for customer to rent as many movies that they wanted with no late fees. In 2011, Netflix shocked their customers with their new price plan by splitting the streamlining of movies to one price and DVD by mail with another price. With the change, Netflix lost one million customers. Pertinent facts in the case
The pertinent facts in this case study are that in 1997, Reed Hastings and Marc Randalph co-founded Netflix. Hastings was upset due to late fee’s he received when he went to return movies that he had rented six weeks earlier. At first, when Hastings came up with the idea, VHS tapes were used for rental, so the cost to ship VHS tapes was too expensive. Then one of Hastings friends advised him of the new DVD technology. With the new DVD technology, Hastings packages the DVD’s in a single envelope and shipped it to himself to see if the DVD would be damaged.
When he received the DVD and found that it was undamaged, he began to create mail-order movie rental business. When Netflix first started, the price to rent a movie was $4 with a $2 shipping fee. With this new service, customers were able to have movies mailed to them, but they had to be back by a certain date or they would be charged late fees. In 1999, Netflix launched a new subscription service, which gave their customers unlimited rentals for a monthly fee of $15. 95 per month. With the subscription, subscribers were able to rent four movies per month.
Within a year, Netflix improved the unlimited movies subscription plan and changed the price to $19. 99 per month. With the new plan, customers were able to rent as many movies as they desire and they could keep them as long as they wanted, but they could only keep four movies at a time. By 2007, Netflix had him a major milestone by hitting one billion movie rental deliveries. That same year, Netflix introduced streamlining of movies directly to either the customer’s home computer. By 2008, customers were able to stream movies through their game consoles.
With customers now able to stream movies directly to their computer or game consoles, Netflix came out with a price plan of $9. 99 per month for streamlining and DVD rental by mail. What is the situation? In 2011, Netflix announced that they would be separating the streamlining of videos and DVD by mail into two subscription prices. The price for streamlining would be $7. 99 per month and DVD by mail would be $7. 99 per month, so if you wanted to both stream movies and rent movies by mail, you would have to pay two different subscription fees.
Netflix also announced that the movie by mail service would be run through qwikster. com. With the price increase of 60% and the announcement of the new website, Netflix lost one million subscribers, taking there subscription total of 25 million, down to 24 million subscribers. Along with the loss of subscribers, Netflix’s stock price dropped from a value of $298 to $169, which is a 40% loss in value. Who is involved? Reed Hastings was who was involved with the price change and he released a statement on September 18, 2011 stating that he had messed up with the way the price change took place.
He went on to try and explain why the price change took place. What are the pertinent issues? The pertinent issues are that when Netflix announced the price change, they made the change fast and did not give their subscriber a chance to decide what they wanted to do. Basically Netflix announced the price change and made the change. By not giving their subscribers a chance to think about the new price change, they just went with it. By doing this, Netflix lost one million subscribers. These price changes not only affected the subscribers, it also affected their stock price.
If Netflix would have gave more of a notice and the reasoning behind the price change, maybe they would not have lost as many subscribers. Recommendations for Netflix The actions that I would recommend for Netflix to recover from a marketing misdirection are that they should have eased into the new price plan or offer a promotional price to their current subscriber. For example, Netflix could have announced the new price plan and at the same time with the new price plan, they could have given their current customer a free trial so that they had the option of either paying the $7. 99 for either the stream lining or the DVD by mail.
By allowing their customers the free trial, Netflix would be showing their customers that they appreciate their business, but they needed to make the price change to fit all customers need. I believe the theory break from reality for Netflix hit hard when they lost so many subscribers. With the price change and loss in subscribers, it opened the doors for Amazon to retain some of the Netflix subscribers. How the arrived to their decision? Netflix arrived to the decision to split the membership in two when they realized that even with the streamlining of movies; customers were still renting movies by mail.
Netflix also realized that not all there subscriber were taking advantage of the streamlining and the subscribers were only renting movies by mail. So by splitting the subscription into two price plans, customers had the choice of streamlining, renting by mail, or both. Conclusion I think the price change was necessary for Netflix, but I think they approached it the wrong way. I was one of the million subscribers who canceled their subscription due to the price change. But even with that said, after about two year, I’m now back with Netflix and I’m subscribing to the streamlining of videos.