Netflix began as a DVD rental business. For a monthly fee, you could borrow as many DVDs as you liked. They would arrive by mail, and you would return them also by mail when you were done. With this innovative business model, Netflix helped drive the huge DVD rental chain Blockbuster, which had thousands of stores nationwide, into bankruptcy in 2009. Gradually, Netflix began to evolve into a movie streaming service, and kept its simple price model of a low monthly subscription fee intact. From 2010 onward, the company was a true online star, boasting 25 million customers by the summer of 2011 and facing virtually no competition.

That such a successful company can fall victim to pride is no surprise. On July 12, 2011, Netflix announced a price increase of 60% and attributed it to a sharp increase in its licensing costs. Those licensing costs, however, did not interest Netflix customers one bit. They responded negatively, though the company's net loss of customers was not so large in percentage terms. Investors were much less tolerant. They roughed up the company even more, causing the share price to plummet by around 75% over the ensuing three months.

Netflix's market capitalization, which once topped $16 billion, eventually fell below $5 billion. Content suppliers cancelled their license agreements. A weaker Netflix also became vulnerable to stepped-up attacks from Amazon and Apple. The moral: one should avoid arrogance in pricing, especially after a run of enviable success.

Following questions:

1.What is the pricing problem present in the case?

2.What is the appropriate pricing model which could have helped Netflix avoid the given pricing problem?

Answer rating: 100% (QA)

Answer 1 The Pricing Problem Present in the Case The key pricing problem faced by Netflix was the 60 price increase that it announced in July 2011 Thi... View the full answer