Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Netflix Tiers Its Streaming Pricing to Maximize Subscribers
Transcript
- Lucas: So Netflix recently reported its highest quarterly subscriber additions in years — over eight million net adds globally. But what's fascinating is how much of that growth is tied to their pricing structure, not just the content slate. Luna: You're talking about the ad tier, the password crackdown, or both? Lucas: Both, but the ad tier specifically. Since launching in late 2022, the 'Standard with Ads' plan has quietly become the most popular entry point in markets where it's available. In the US, it costs roughly seven dollars a month — about half the price of the ad-free standard plan. Luna: And I've seen reports that nearly a third of new sign-ups now choose that ad tier. That feels like a huge shift for a company that built its brand on being commercial-free. Lucas: Right. But what's smart about Netflix's approach is how they've structured the three tiers. There's the ad tier at about seven bucks, the standard tier at around fifteen fifty, and the premium tier at about twenty-three dollars. The premium gives you 4K and more simultaneous streams. But the key is that the standard tier is deliberately positioned as the 'sweet spot.' Luna: The classic decoy effect — premium makes standard look reasonable by comparison. Lucas: Exactly. If you put just two options — ad-supported and standard — a lot of people might pick the ad tier. But add a premium tier that's way more expensive, and suddenly the standard plan feels like a good deal. Netflix's own investor letters show that the majority of new subscribers still choose standard or above, not the ad tier. Luna: So the ad tier is more of a funnel than a revenue driver. It captures people who were sharing passwords or on the fence, then upgrades them over time. Lucas: That's exactly the theory. And it explains why they haven't pushed harder to monetize the ad tier. They're patient. They want to grow the base first, then raise prices or improve ad load later. This is a long game. Luna: But what about international pricing? Netflix doesn't charge the same in India as it does in the US. Lucas: No, and that's a whole other layer. In India, they offer a mobile-only plan for about two dollars a month — no HD, one phone at a time. That's a conscious trade-off between ARPU and reach. India has massive price sensitivity, so a single price point would leave most of the market on the table. By tailoring tiers to local willingness to pay, they can add millions of subscribers without diluting the brand in richer markets. Luna: So they're essentially using a version of international price discrimination, but they frame it as different tiers with different features. Lucas: Exactly. And it works. Since adding the mobile plan in India, their subscriber count there has more than doubled — even though average revenue per user is much lower. But the cost of serving those subscribers is also low because Netflix doesn't have to license expensive content for every market. Luna: That's a good point. Their content costs are largely fixed — they spend billions on originals that are available globally. So adding a low-price tier in a new market comes with very low marginal cost. Lucas: Right. The marginal cost to stream to one more subscriber in India is almost zero. So any revenue above zero is incremental profit. That's the beauty of digital goods. And it's why Netflix can afford to price aggressively in emerging markets while charging premium in places like North America. Luna: Let's talk about the password-sharing crackdown. That was essentially a pricing move disguised as a policy change. Lucas: Totally. By forcing sharers to either pay extra for an 'extra member' slot or start their own account, Netflix effectively raised the average revenue per household without raising the headline price. In the US, an extra member costs about eight dollars. That's more than the ad tier. So some sharers ended up paying more than they would have if they'd just subscribed directly. Luna: But wait — why would anyone pay eight dollars for an extra member when they could just start their own ad-tier account for seven? Lucas: Because the extra member slot attaches to the main account's plan, so they might get HD or 4K depending on the primary account. Also, some people just don't want ads. The crackdown created a natural segmentation: heavy users and those who value ad-free experience pay extra; casual users go for the ad tier. It's a textbook price discrimination setup. Luna: So the lesson here for any business selling a service is: think about how you can use tiering and add-on fees to capture different willingness to pay without alienating your core customers. Lucas: Exactly. And it's not just about raising prices — it's about structuring options so that customers self-select into the right bucket. Netflix's management has said they view the ad tier as a way to serve households that 'couldn't afford or didn't value the service enough before.' That's a nice way of saying they're expanding their total addressable market. Luna: And it's working. Even after the price increases and crackdown, churn rates have stayed low. In fact, they dropped in the quarters after the crackdown. Lucas: Right, and that's the ultimate test. If you can add millions of subscribers and raise average revenue per user at the same time, you've found a pricing sweet spot. Netflix's average revenue per subscriber globally has actually increased slightly over the past two years, even with the ad tier dragging it down — because the standard and premium subscribers are paying more. Luna: So the ad tier is a net positive, but only because it brings in people who would otherwise not pay at all, and it doesn't cannibalize the higher tiers too much. Lucas: Precisely. And the data backs that up. In their earnings calls, they've mentioned that the ad tier has a higher contribution margin than the standard tier because advertising revenue covers most of the difference. So even if the price is lower, the profit per subscriber isn't that far off. Luna: That's a great point. I recall them saying the ad tier actually has a similar profit margin to the standard tier once you factor in ad revenue. So it's win-win. Lucas: Exactly. And that's the hidden genius. Most people assume a lower price means lower profit, but if you layer in a second revenue stream — advertising — you can maintain margins while growing the base. Luna: So what's the key takeaway for businesses listening? If you're thinking about introducing a lower-priced tier, you need to ensure it doesn't steal customers from your premium offering unless you have a compensating revenue stream like ads. Lucas: Yeah, and you need to design the feature differences carefully. Netflix makes the ad tier just annoying enough — you get ads, no downloads, and some content licensing restrictions — that the standard tier feels like a clear upgrade. That's the decoy effect in action. And if you're in a subscription business, you can apply the same logic: three tiers, with the middle one being your primary profit driver. Luna: Before we wrap, I want to note — these kinds of strategic pricing insights are exactly why we do this show. And if you're finding value in these conversations, we'd love your support to keep it ad-free and independent. Lucas: Absolutely. If these episodes have helped you think differently about your own pricing or just given you something to discuss with colleagues, you can support the show by buying us a coffee at buy me a coffee dot com slash fexingo. No pressure, but it genuinely helps us keep going. Luna: Yeah, we appreciate everyone who listens. So back to Netflix — what do you think is next for their pricing? More tiers? Lucas: Possibly. I could see a super-premium tier with spatial audio or live sports included. They've already started experimenting with event-based pricing for things like the Tyson-Paul fight. But the core strategy of tiering to capture different segments will remain. The real question is how high they can push the premium tier before resistance builds. Luna: And as they add more live content and gaming, the pricing levers will only multiply. It's a fascinating case study that keeps evolving. Lucas: It really is. So next time you're scrolling through Netflix's plans, think about the economic logic behind each option. They're not just offering choices — they're guiding you to pick the one that maximizes their revenue while making you feel smart about your decision.