Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Netflix Priced Itself Into a Subscriber Rebound
Transcript
- Lucas: So June 2026, Netflix is now comfortably the most profitable streamer in the world. But if you go back just four years, everyone thought they were dead. Luna: Right — April 2022, they lose 200,000 subscribers in a single quarter, stock drops 35 percent overnight. The narrative flipped completely. Lucas: Exactly. And the conventional take was that they'd run out of pricing power — that the market was saturated, competition was too intense, and Netflix had no room to raise prices anymore. But what actually happened is that Netflix reinvented its pricing structure in three very specific moves. And those moves turned the business around. Luna: Three moves — is that the ad tier, the password crackdown, and the price increases on premium plans? Lucas: Bingo. And I think the fascinating part is that each move alienated a different segment of customers. The ad tier annoyed people who'd been paying for ad-free. The password crackdown enraged a huge chunk of the user base. The price increases made existing subscribers grumble. And yet, collectively, they restored Netflix's pricing power. Luna: So the question is — why did this work when it seems like it should have backfired? Lucas: Let's start with the ad tier. Launched in November 2022 at $6.99 in the US. That's roughly 30 percent cheaper than the standard plan at the time, which was $9.99. Now the key insight here isn't that Netflix suddenly wanted to be in the ad business — they'd famously resisted it for years. It's that the ad tier let them segment the market in a way they never could before. Luna: Segment how? They already had three price tiers — basic, standard, premium. Wasn't that already segmentation? Lucas: Not really, because those tiers were just about resolution and number of screens. They were feature-based segmentation, not willingness to pay segmentation. The ad tier introduced a genuine price-quality trade-off. If you're price-sensitive, you get a cheaper product that's slightly worse because of ads. If you're not price-sensitive, you get the premium experience. That's textbook price discrimination — and it works. Luna: And the data backs that up. By early 2024, the ad tier had about 40 million monthly active users globally. That's roughly 15 percent of Netflix's subscriber base, and they're contributing meaningful revenue from both subscriptions and ad sales. Lucas: Right. And here's the part I love — the ad tier actually increased average revenue per user over time. Because some people who would have churned entirely at $9.99 now pay $6.99 plus see ads. That's more revenue than zero. And some people who were on the basic ad-free plan at $9.99 upgraded to standard ad-free at $15.49 because they didn't want ads. So Netflix captured both ends of the market. Luna: And that brings us to move two — the password-sharing crackdown. This was the most controversial, and honestly, the one I thought would fail. Lucas: I think a lot of people did. The conventional wisdom was that Netflix would lose subscribers — and they did initially, about 600,000 in the US in the second quarter of 2023 after the crackdown rolled out. But then something interesting happened. Luna: They added almost 6 million new subscribers in the next quarter. The spike was huge. Lucas: Exactly. And the reason is straightforward: Netflix had roughly 100 million households using the service without paying. Those households were getting the product for free. When Netflix forced them to either pay or leave, a significant portion chose to pay. The crackdown effectively converted freeloaders into paying customers. Luna: And they made it easy — the 'add an extra member' feature at $7.99 per month in the US. That's cheaper than a full subscription, so the friction is low. Lucas: Right. And the genius is that Netflix didn't just cut off password sharers. They gave them a path to pay less than a full subscription but more than zero. It's a classic conversion funnel. They identified a large pool of users who already valued the product — they were using it every week — and gave them a low-friction way to become customers. Luna: And the third move — the price increases. Netflix raised prices on the standard and premium plans in 2023 and again in 2024. The premium plan went from $19.99 to $22.99 in the US. That's a 15 percent increase in a year. Lucas: And churn remained low. Why? Because Netflix had strengthened its value proposition. By 2024, they had a massive content library, great originals, and a seamless user experience. And crucially, the ad tier and the password crackdown had already filtered out the most price-sensitive users. The people left on the premium plans were the ones with high willingness to pay. So Netflix could raise prices on them without losing many subscribers. Luna: So the three moves work as a system. The ad tier captures price-sensitive users who would have left. The password crackdown converts freeloaders into lower-paying customers. And the price increases extract more value from the least price-sensitive segment. It's like a three-tier pricing engine. Lucas: That's exactly right. And the numbers tell the story. Netflix's average revenue per user in the US went from about $14.50 in early 2022 to over $17 by mid-2025. Their operating margin expanded from 18 percent to over 25 percent. And their subscriber base grew from 220 million to over 280 million globally. They achieved both higher prices and more subscribers. Luna: Which is the definition of pricing power — the ability to raise prices without losing customers. And they did it in an intensely competitive market. Lucas: And that's the lesson for other subscription businesses. Most companies think pricing power is about brand strength or product quality. And those matter. But Netflix showed that pricing power is also about market segmentation — designing your pricing structure so that every customer pays close to their maximum willingness to pay. Luna: Before we go on, I want to mention something that relates to this idea of designing a pricing structure that works for everyone. We keep this podcast ad-free because we believe that's the best experience for listeners like you. If you find these conversations useful in your work, you can support the show at buy me a coffee dot com slash fexingo. It's how we keep it independent and focused on the content. Lucas: Yeah, and we appreciate that. It allows us to go deep on cases like this without worrying about sponsors. So back to Netflix — the really interesting question is whether this approach can be sustained. Luna: What do you mean? The ad tier is growing, password sharing is mostly monetized, and they keep raising prices. Isn't that sustainable? Lucas: In the short term, yes. But there are limits. The password crackdown is a one-time conversion event — you can't do it again. The ad tier has to compete for ad dollars with the likes of YouTube and Amazon. And price increases eventually hit a ceiling where even loyal subscribers balk. The question is whether Netflix can continue to add value fast enough to justify higher prices. Luna: So the pricing power isn't infinite. It's contingent on content investment. Lucas: Exactly. Netflix is spending about $17 billion on content in 2026. That's more than any other streamer. But if that spending ever stops translating into hit shows and movies, the pricing power erodes. The three-tier pricing engine only works if the product is worth paying for. Luna: And that's the real test. Can Netflix keep producing enough hits to justify a $23 premium tier? Or will subscribers eventually downgrade to the ad tier or cancel? Lucas: That's the million-dollar question — or really, the 23-dollar question. But for now, Netflix has given every subscription business a masterclass in how to restore pricing power through clever segmentation. Luna: Agreed. And a reminder that sometimes the best pricing move isn't to charge everyone the same — it's to charge everyone differently. Lucas: Exactly. That's the takeaway. Thanks for listening, and we'll see you next time on Pricing Power.