1. Refer to Appendix 2, Marketing by the Numbers and calculate the monthly contribution Netflix realizes from a subscriber at the price of $9.99 per month and $15.98 per month, respectively. Assume average variable costs per customer are $3.50 per month, which do not change with the price increase. How many disgruntled customers can Netflix lose before profitability is affected negatively?
2. Is this a smart move by Netflix? Discuss the pros and cons of such a drastic price increase.
Price increases are always a thorny issue with consumers, and Netflix, the video-streaming and DVD-by-mail giant, set off a firestorm by announcing a 60 percent price increase on its most affordable rental plan. Previously, for $9.99 per month, customers were able to rent one DVD at a time plus enjoy unlimited streaming over the Internet. That same service now costs $15.98 per month, a combination of an existing $7.99-a-month streaming-only plan with a new $7.99-a-month DVD-only plan that allows customers to receive one disc at a time via mail. So customers either had to ante up to continue with the same level of service or step down to one of the more limited services priced at $7.99 per month. Most customers switched to the streaming-only option, which reduced variable costs for Netflix due to postage savings. Netflix had 23 million subscribers of the $9.99 per month DVD/ streaming hybrid plan prior to the price increase.