Thursday, October 21, 2004

How Low Can You Go: Netflix Imbricated in DVD Rental Price Wars

[Originally appeared as "Will Netflix Drop Their Price Even Further?" by by Frank Ottink, COO YEALD.]

To my surprise, I saw the $16 monthly rate offer when investigating the Netflix site again. See also the link to the screen shot below. I tried it again and again $ 16 popped up. Then I deleted the Netflix cookie, returned to the site and I got a quote of $ 20.

This might be caused by some technical glitch, but more probably, Netflix is using this period to test the effects of different pricing strategies on new customer acquisition.

In addition Netflix could also use this strategy to test customer profitability. This might be counterintuitive at first but it might very well be possible that lowering the price might lure a more profitable customer type.

With the old $ 22 rate, customers might feel the need to recoup their investment and make a deliberate effort to rent and view as many DVD as they can in one given month. As income is fixed and distribution and delivery costs are variable with every DVD rented, this might lead to a situation where these customers become unprofitable.

With a lower rate like $16, Netflix might become attractive to customers who do not wish to rent a considerable number of movies per month but are happy with a smaller number of movies per month and the added convenience of on-line ordering and home delivery. This would result into less revenue but a more profitable customer.

If this is the case, Blockbuster and Wal-Mart might have already been signing up more profitable customers than Netflix and as a result have a better customer mix.

However, whether this is true or not is very difficult to establish and the only way to find out is to test it. Netflix apparantly sees this period of price adjustments as a window to experiment. An interesting move but another confusing signal to stakeholders interested in the survival challenge of Netflix.

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