But, Following a Smart Customer Needs Segmentation, the Number of Netflix Users Continues to Grow
In 2022, I paid $16.73/month for ad-free Netflix, where I routinely enjoyed such entertainment as The Witcher, Bridgerton and The Great British Baking Show. Now, we pay $33.07 per month, and I am still watching The Witcher, Bridgerton and The Great British Baking Show for about double the price over two years ago.
The newest Netflix pricing strategy irritated subscribers, such as these Redditors:
“Man. Remember the $4.99 a month days? Pepperidge… never mind. I’m on the verge of cancelling all of them, and reading a book again. Or going outside.”
“I’m starting to consider cutting them for the first time. I remember paying less than $10 a month. And I have to get the most expensive tier for 4k and I can’t even share with my friends or family anymore.”
“I know so many people including myself that cancelled. I’m not paying that much for a streaming service.”
However, despite these customers’ intentions, Netflix currently enjoys over 260 million subscribers, with 12.8% growth since Q4 2022.
A Quick Primer on the Impact of Raising Prices
Companies can raise the prices of their products and services (and take more profit to the bank) so long as the units lost from the price increase do not overwhelm the price increase– and assuming that unit costs are not substantially changed by the unit decrease.
Here’s a simple price increase example where profit increases:
| Regular | Price Increase | Change | |
| Weekly units | 1,000 | 900 | (100) |
| Revenue per unit | $3.00 | $3.25 | $0.25 |
| Cost per unit | $1.50 | $1.50 | $0.00 |
| Profit per unit | $1.50 | $1.75 | $0.25 |
| Total weekly profit | $1,500.00 | $1,575.00 | $75.00 |
Weekly profit increased by $75, since the profit loss from lost units was $150 ($1.50/unit on 100 lost units) while the profit gain was $225 ($.25/unit on 900 units remaining). In economist-speak, the elasticity of demand was low enough (-1.2) to lose fewer units at the new price than the gain from the price increase.
However, this happy outcome does not always happen. Increasing prices can lower profits:
| Regular | Price Increase | Change | |
| Weekly units | 1,000 | 750 | (250) |
| Revenue per unit | $3.00 | $3.25 | $0.25 |
| Cost per unit | $1.50 | $1.50 | $0.00 |
| Profit per unit | $1.50 | $1.75 | $0.25 |
| Total weekly profit | $1,500.00 | $1,312.50 | -$187.50 |
Now, weekly profit has declined by $187.50, as units lost were greater than the price increase on the remaining units.
While the math is simple in theory, how do companies know how the market will react to their pricing decisions? For Netflix, these predictions come from understanding consumer behaviors surrounding content consumption.
TV Time in the US
According to Forbes (“Top Streaming Statistics in 2024”), 99% of US households have at least one streaming service. The average number of streaming services is 2.9, with a monthly spend of $46.
As of 2022, Cable held a slight lead over streaming in the number of hours that Americans spent watching TV, according to Nielsen. Streaming is catching up to Cable, with a 21% growth rate from 2021 to 2022. Further, 50% of those who pay for a streaming service pay for one without advertising.
Of those many streaming hours, Netflix continues to be the leader, with the greatest number of users in 2024 at 247.2M (Digital Trends). The number two streaming service, Amazon Prime Video, has 20% fewer users at 200M. All of the remaining top 10 streaming services have fewer than half as many users as Netflix. In fact, Paramount+, Hulu, Peacock, ESPN+, AppleTV and Starz combine to fewer users (207M) than Netflix has on its own.
As the data shows, Netflix is in an enviable, market-leading position. However, in addition to competitors challenging it, users show significant price sensitivity. 35% of Netflix users indicated in a survey done by Forbes Home (2023) that they would cancel their service if the price rose.
Netflix Pricing Strategy, Based on Customer Segmentation
Netflix’s pricing strategy was a three-pronged approach:
- convert free-rider households into paying households
- increase the price for no-ad service
- monetize the value of more simultaneous streaming and add-on households
In the spring of 2023, it implemented barriers to prevent password sharing and offered the following pricing plans for a single household to replace the previous $9.99/month no-ad plan:
- $6.99/month with ads
- $15.49/month without ads, watch on two devices simultaneously and could add another household for $7.99/month
- $19.99/month without ads, watch on 4 devices simultaneously and could add two additional households for $7.99/month each (Today, this plan is $22.99)
The pricing structure follows “Good, Better, Best Pricing,” which Insight to Action has written about before. Each of these plans were designed with a specific customer segment in mind. First, a lower-price plan that would be subsidized by ad revenue for those who value price over the inconvenience of advertising. Second, those who value and are willing to pay for no-ad streaming, use two or fewer devices simultaneously and/or have none or only one other household to add. Notice that while adding another household is significantly less than the first household, ($7.99 versus $15.49), there is still a premium over the streaming service with advertising. And, finally, a plan that allows a household to add two additional households and stream four devices simultaneously. Now you pay for what you use and what is important to you.
Switching to the new pricing strategy not only increased users each quarter but also showed more growth than in 2021 or 2022 (2020 was an outlier with the start of the pandemic).
Likewise, revenue increased.
Why Did the Price Strategy Work for Netflix?
Netflix successfully changed its pricing strategy for several reasons:
- While other streaming services are competitors, each of the streaming services is partly a monopoly with the content that they produce themselves. Seriously, where else could I see The Witcher?
- They benefit from a form of the “automatic opt-in” phenomenon, where more people will opt-in when that is the default option, and they have to make a choice to “opt out.” For those who are current subscribers, they are automatically “opted in” and would have to take action to opt out.
- And, how many subscribers are unaware of the price increase when they have auto payments set up?
- But, most importantly, Netflix understood the different needs of its customers and priced its options to maximize revenue for each of the different need segments.
When a company plans to implement a publicly unpopular price increase, it must have a thorough understanding of its customer segmentation. The Netflix pricing strategy shows success in action. For more examples, check out our Pricing Strategy Resources. And get introduced to the Insight to Action experts at an Office Hours event. We hope to see you soon.
