What’s the Announcement?
Netflix has been raising its prices on a relatively consistent basis for some time. This time, the streaming site released its year-end and quality results letter. It’s the letter that goes out to shareholders to detail how the company has performed this year, and how it intends on improving results next year.
Customers who are still on grandfathered plans will have to pay $9.99 for HD streaming, which is an increase of $2.00 per month. This puts them on the same level as new subscribers. Netflix said in the letter that since these members had already been with the company for two years they only expected a minimal loss of customers. The new pricing structure is expected to come in by early October.
What Does Elevated Churn Mean?
The term “elevated churn” is a term Netflix used in its letter. It means the company thinks that because these people have been with the service for this long there’s no need to worry about them leaving in revenge.
This reveals the strategy Netflix has been adopting for some time. The idea was that if customers became used to the service they would be less likely to abandon that service if something adverse happened. The company is clearly banking on customers not moving to some other service. This is a calculated risk on the part of the company.
Will the Same Bad PR Hit the Company?
When it tried to raise prices the first time Netflix was forced to back down because of bad PR. Its loyal members banded together to protest the changes. The resulting negative publicity damaged the company’s prospects and forced it to back down.
There’s less chance of Netflix doing the same again because new customers not on these loyalty programs are in the majority. The last time it tried this, their loyal customers made up a huge part of their total user base. Netflix is clearly assuming many of the grumblers will simply accept the changes.
Netflix is More Established
The simple fact is that Netflix is an established company and it can survive making unpopular changes like that. There are competitors to Netflix, but none of them are strong enough to actually take it on. This leaves Netflix in a position where they have a majority share of the industry.
The question is whether unpopular changes like this can cause other competitors to rise. The largest competitor is Amazon, who started their own streaming service. They have gone even further and created a number of original shows. Netflix is sure to see Amazon as their primary competitor in the coming years.
Acts like this won’t help them to win the loyalty of their customers. Netflix is sure to see its online reputation take a major beating over this. And people do remember when companies do this. They don’t have short memories like a lot of CEOs seem to think.
Is There Any Legal Recourse?
Some Netflix users are wondering whether reneging on this agreement could technically be a breach of the agreement with its users. Sadly, this isn’t the case because Netflix has never legally committed to not raising its prices. On the contrary, in its original decision to grandfather its older users into the new system, there was never a direct promise to not change their minds.
Customers thought that the company would stick to its word and older users would be able to stay on the old rates forever. It appears that the company is against this and so it’s risked the loyalty of its core group of customers.
Will This Actually Cause Any Impact to the Company, Though?
In the short-term, some people are likely to leave in protest. The first quarter following the changes could see a slight decrease in the number of subscribers the company manages to take on. But Netflix clearly believes this will recover because people will be willing to pay for the exclusive content on offer. Many of these loyal customers could come back and subscribe again.
Is This Bad for Business?
There are some moral and ethical arguments against what Netflix has done, but the chances are the move won’t hurt its profits. The number of people who will accept the changes will outweigh those who decide to stop paying entirely.
The size of the price increase means these loyal customers are actually less valuable to the company, at least when it comes to a subscription-based service. In the long-term, this could leave a bitter taste in people’s mouths but there’s no indication that it could cause any real problems for Netflix.
It should be said that the company hasn’t made an official announcement regarding this change. A shareholder leaked a copy of the letter where Netflix said they would be removing the grandfathering benefits afforded to its core users. There’s still a chance the company could go back on its plans and delay its changes again.
However, all signs point toward the company going through with these alterations. Corporations are rarely so explicit unless they seriously intend on doing something.
Grandfathering properly and taking care of your customers is crucial. This is why the Microsoft LinkedIn deal came with a lot of assurances over this. What do you think are the implications of this announcement?