Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Netflix Priced Its Way to Streaming Dominance
Transcript
- Lucas: So earlier this week I got my monthly email from Netflix — seven ninety-nine for the standard plan, no ads. And I had this moment of recognition: that same price, seven ninety-nine a month, was what Netflix charged for its very first streaming-only plan back in 2007. Luna: Wait — they've kept the same price for almost twenty years? Lucas: No, that's the thing — they haven't. The seven ninety-nine plan still exists on paper, but it's now the ad-supported tier. The standard ad-free plan is fifteen forty-nine. The premium is nineteen ninety-nine. So the headline price is a bait and switch, but the real story is how Netflix has managed to more than double its average revenue per user over that period without losing the core of its subscriber base. Luna: And that's the pricing power question, right? How do you keep raising prices when every competitor — Disney, HBO, Apple — is launching at similar or lower price points? Lucas: Exactly. And I think the answer lies in a few specific decisions that Netflix made along the way. Let's start with the original move that defined everything: the 2007 shift from dvd by mail to streaming. They priced streaming at seven ninety-nine, which was cheaper than the DVD plans at the time. It was deliberately low to drive adoption. Luna: And it worked. By 2011 they had about 24 million streaming subscribers in the U.S. alone. Lucas: Right. But in 2011 they made the first big pricing mistake — or at least, a mistake in execution. They tried to spin off the DVD business into a separate company called Qwikster, and simultaneously raised prices for customers who wanted both DVD and streaming. The result was a PR disaster. They lost about 600,000 subscribers in a single quarter, and the stock dropped more than 25 percent. Luna: I remember that. The backlash was vicious. Customers felt like they were being nickel and dimed. Lucas: And the lesson Netflix learned — and I think this is key — is that you can raise prices, but you have to do it behind a veil of added value. You can't just say 'we're charging more.' You have to give customers a reason to feel like they're getting something better. So after the Qwikster disaster, Netflix pulled back. They didn't raise prices again on the streaming side for almost three years. Luna: But eventually they did. And they've done it repeatedly since. Lucas: Yeah. 2014, they raised the standard plan from seven ninety-nine to eight ninety-nine. Then in 2015, to nine ninety-nine. Then 2017, to ten ninety-nine. Then 2019, to twelve ninety-nine. Then 2022, to fifteen forty-nine. Each time, they paired the increase with a narrative about more original content, better quality, 4K, HDR, multiple screens. Luna: So the playbook is: invest in content, raise price, invest more, raise again. The content moat justifies the price increase. Lucas: That's the theory. And for a long time, it held. Netflix was spending billions on originals — 'Stranger Things,' 'The Crown,' 'The Witcher' — and subscribers kept coming. But by 2022, something shifted. They lost subscribers for the first time in a decade. Two quarters in a row. The stock cratered more than 60 percent. Luna: Yeah, I remember that. People were calling it the end of the streaming boom. Lucas: But what did Netflix do? They doubled down on pricing. But this time, they added a new lever: the ad-supported tier. In November 2022, they launched a six ninety-nine ad plan in the U.S. It was a way to re-anchor the value perception. Suddenly, the standard plan at fifteen forty-nine felt premium because there was a cheaper option with ads. Luna: And it worked, right? They added millions of subscribers on that tier. Lucas: Yeah. And then in 2023 they pulled the second lever: the password-sharing crackdown. They started charging extra for sharing your account outside your household. In the U.S., that's an additional seven ninety-nine per month per extra member. They lost some subscribers initially, but within months they added 8.8 million new subscribers globally in the first quarter after the crackdown. Luna: So the password crackdown was effectively a price increase disguised as a policy change. Lucas: Exactly. And that's the brilliant part. They turned non-paying users into paying users without having to raise the headline price. The average revenue per user went up, and the subscriber count went up. That's the definition of pricing power. Luna: But it raises a question: is this sustainable? At some point, customers hit a budget ceiling. There's only so much you can charge for a streaming service before people start cutting. Lucas: That's the big uncertainty. Netflix's own data shows that the cancellation rate spikes when they announce a price increase, but it normalizes within a couple of months. The question is whether that's because the content is truly irreplaceable, or because inertia is strong. I'd argue it's a mix. But there's a limit. The average U.S. household now spends about fifty-five dollars a month on streaming services. That's approaching the old cable bundle price. Luna: And that's where the ad tier becomes the safety valve. If customers balk at fifteen dollars, they can drop down to seven dollars with ads. Netflix captures revenue either way. Lucas: Right. And that's the genius of the multi-tier strategy. It creates a price ladder. The people who are price-sensitive go to the ad tier. The people who value convenience and no ads stay on the premium tier. Netflix gets the maximum willingness to pay from each segment. Luna: And speaking of willingness to pay — a quick honest thing here. We keep this podcast ad-free because a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo. That's literally what funds making this many of these. If these conversations have moved your work forward in some small way, it helps keep the lights on. Lucas: Yeah, and we don't do sponsors or ad reads, so it's a clean signal. No pressure at all — just mentioning it because we're able to make this show because of that support. Back to Netflix: the other interesting comparison is how Disney+ priced itself. Luna: Right. Disney launched at six ninety-nine in 2019, which was a clear undercut of Netflix. They wanted rapid adoption. Lucas: And they got it — they hit 60 million subscribers in just over a year. But then they started raising prices too. By 2024, Disney+ ad-free was thirteen ninety-nine. So the gap between Disney and Netflix narrowed significantly. Netflix's pricing power forced competitors to follow, not lead. Luna: But there's a difference, I think. Netflix can raise prices because they have a deep library of owned content and a recommendation engine that keeps people hooked. Disney has franchises — Marvel, Star Wars, Pixar — but those are also available in theaters and on Blu-ray. The moat is real, but it's different. Lucas: That's a good point. Netflix's moat is the combination of content volume and personalization. Disney's moat is brand loyalty and IP. But both are discovering that there's a ceiling. In 2024, Disney+ actually lost subscribers for the first time. The price increases were starting to bite. Luna: So where does Netflix go from here? The low-hanging fruit of password cracking is picked. The ad tier is established. What's the next pricing lever? Lucas: That's the billion-dollar question. One possibility is dynamic pricing — charging more for new releases or for access to certain content. Netflix has been experimenting with charging extra for 'screening room' type experiences, like the live 'Hot Ones' episodes. Another is bundling. They've already partnered with Microsoft for ad tech, but they could bundle with other services, like fitness apps or music streaming. Luna: Or they could follow the Amazon Prime model and integrate Netflix into a broader subscription bundle. Lucas: Exactly. But the core lesson from Netflix's pricing history is this: pricing power isn't just about being able to raise prices. It's about having the product depth and customer understanding to raise prices without losing the customers who matter most. Netflix lost 600,000 subscribers in 2011, but today they have over 260 million. The key is that they used those early losses to learn how to message price increases, how to tier their offering, and how to use policy changes like password sharing as a stealth price increase. Luna: So the takeaway for any business — don't be afraid to raise prices, but build the value narrative first. And always have a lower-tier option to catch the price-sensitive. Lucas: That's it. And I think the next five years will tell us whether Netflix can keep that formula working, or whether the content inflation — the cost of making shows and movies — will eventually outrun their ability to raise prices. Because the cost of originals keeps going up. A single season of 'Stranger Things' costs around 270 million dollars. That's a lot of seven ninety-nine subscriptions to amortize. Luna: Yeah. At some point, the math has to work. It'll be interesting to see if they pivot to more licensed content or rely more on the ad tier for revenue. Lucas: For now, the market seems to have faith. Netflix's stock is near all-time highs. But the next earnings call will tell us a lot. If subscriber growth slows again, the pricing power narrative might need a rewrite. Luna: And that's the thing about pricing power — it's not permanent. It has to be earned every quarter. Lucas: Exactly. Thanks, Luna. And thanks to everyone listening. Until next time.