Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Netflix Priced Its Way Into Every Living Room
Transcript
- Lucas: Netflix added 30 million paying subscribers in 2025 alone, and almost none of them signed up because of a new show. They signed up because Netflix made it too annoying to keep sharing someone else's password. Luna: That's a pricing move disguised as a policy change. And it worked. Lucas: Exactly. And that's the story I want to unpack today — how Netflix has used pricing, not just content, to become the most valuable media company on earth. From $8.99 streaming in 2007 to a nine-tier global menu in 2026. Luna: Nine tiers? I knew they had a few, but nine is wild. Lucas: Standard with ads, standard, premium, then the same three in different currencies for different regions — plus mobile-only plans in India and parts of Southeast Asia. The point is, Netflix doesn't just set one price. It sets a lattice of prices based on what each market will bear. Luna: Let's go back to the beginning. When did Netflix first have to make a real pricing decision? Lucas: 2007. That's when they introduced streaming as a free add-on to the dvd by mail service. You paid, say, $9.99 for unlimited DVDs, and streaming came along for nothing extra. The pricing was essentially 'all you can eat for one price.' No one had done that with movies before. Luna: But that wasn't sustainable, right? Eventually they had to unbundle. Lucas: Right. In 2011, Netflix tried to split the business. They announced that DVDs and streaming would be separate — you'd pay $7.99 for each. That became famous as the Qwikster debacle. The stock dropped 70 percent in four months. They lost 800,000 subscribers. It was a pricing disaster. Luna: But they reversed course, didn't they? Kept it bundled but raised the price anyway. Lucas: Sort of. They killed Qwikster but effectively raised the blended price over the next two years. And here's the thing — by 2013, they had original content. 'House of Cards' won Emmys. That gave them cover. They could say, 'You're paying more, but you're getting something you can't get anywhere else.' Luna: That's the classic value-based pricing move. Tie the price increase to a visible improvement in the product. Lucas: Exactly. And they've done it again and again. In 2014, they raised the standard plan from $7.99 to $8.99. In 2017, it went to $9.99. In 2019, $12.99. In 2022, $15.49. Each time, they launched or announced a slate of big originals right before. Luna: But there was a real pushback moment, wasn't there? 2022, when they actually lost subscribers for two quarters in a row. Lucas: That was the inflection point. In Q1 2022, Netflix lost 200,000 subscribers. The stock fell 35 percent in a single day. The narrative flipped from 'Netflix can raise prices forever' to 'Netflix has hit a wall.' Luna: And then they launched the ad tier. That was a huge reversal. Reed Hastings had said for years that Netflix would never do ads. Lucas: Right, but pricing is about options. The ad tier came in at $6.99 in the U.S., $3 less than the standard plan. It immediately attracted people who had cancelled or were sharing passwords. By the end of 2023, the ad tier had 23 million monthly active users. And it gave Netflix a new lever — they could show advertisers that they had a growing audience of hard to reach cord-cutters. Luna: So the ad tier wasn't just about subscriber growth. It was about creating a second revenue stream from the same customer. Lucas: Exactly. And that leads directly to the password-sharing crackdown. In 2024 and 2025, Netflix started charging extra for sharing outside your household. In the U.S., it's $7.99 per month for each extra member. That's basically the same price as the ad tier, but without ads. It's a genius price anchor. Luna: Because if you're a freeloader, you think, 'Well, for $7.99 I can get my own account with ads — or I can pay $7.99 to keep mooching off my friend's premium plan without ads.' Either way, Netflix gets paid. Lucas: And 30 million people chose one of those options in 2025 alone. That's why Netflix's average revenue per user has gone from $8.61 in 2017 to over $16 in the latest quarter. It's not because they're adding tons of new subscribers in the US — that market is saturated. It's because they're extracting more money from the people who are already watching. Luna: Let's talk about the competitive landscape. Disney Plus launched at $6.99, then raised to $10.99, then $13.99. HBO Max went from $14.99 to $15.99. But Netflix is still the most expensive — $15.49 for the standard plan without ads. How do they keep getting away with it? Lucas: Partly habit. Partly the sheer volume of content. But I think the real answer is that Netflix has the best recommendation algorithm. The switching cost isn't just the $15.49 — it's the 200 hours you've spent training the algorithm on what you like. No other service has that data. Disney can't know that you watched every episode of 'The Office' twice. Luna: That's a sticky product. But eventually, won't customers hit a limit? I mean, how much can you raise prices before people cancel? Lucas: There's a theory in pricing called the 'price ceiling' — the point where demand drops off a cliff. For Netflix, we may be seeing it now. In 2026, they've held prices flat for the standard plan for over a year. They're pushing growth internationally instead. India, Africa, Latin America. Those markets have much lower price points — a mobile-only plan in India is $2.79. Luna: So the strategy is: squeeze the developed markets for margin, and compete on volume in emerging markets. Lucas: Exactly. And that's a smart global pricing strategy. But you have to be careful. If you squeeze too hard in the US, you might accelerate the shift to ad-supported tiers, which have lower direct revenue per user. The ad revenue makes up for it, but it's a different business model — you're now a media company selling audience, not just a subscription service. Luna: Before we go deeper on that, I want to pause on something you said earlier about the algorithm. That's really the moat, isn't it? The data. Lucas: It is. And you know, that's partly why we can do this show the way we do. We don't have a giant ad sales team, we don't run programmatic ads, we don't sell your listening data. A handful of listeners who find value in these conversations chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many episodes. It's a different model — listener-supported, not advertiser-supported. And it lets us talk about pricing without any sponsored agenda. Luna: I think that's part of why people trust the show. You're not trying to sell them anything. You're just explaining how the world works. Lucas: That's the goal. And if these conversations have moved your work forward in some small way, the buy me a coffee link is there. No pressure, no perks, just a way to keep the lights on. Now back to Netflix — because I want to talk about the ad tier's pricing power specifically. Luna: What about it? It's only $6.99. How is that pricing power? Lucas: Because the ad tier's real price isn't $6.99. The real price is $6.99 plus 4 to 6 minutes of ads per hour. That's a hidden price increase. And advertisers pay Netflix for that attention — about $25 per thousand views in 2025, up from $18 in 2023. So Netflix is effectively double-dipping: charging the subscriber and charging the advertiser. Luna: And the subscriber doesn't feel the price increase because they see a lower upfront cost. Lucas: Exactly. It's a version of the razor and blades model. Give away the razor, charge for the blades. Here, give away the lower subscription, charge with ads. Netflix's ad revenue in 2025 was about $4.5 billion, and analysts expect it to hit $7 billion in 2026. That's pure margin expansion. Luna: But doesn't that cannibalize the higher-priced tiers? If everyone switches to ad-supported, you lose the $15.49 subscribers. Lucas: It does cannibalize, but the data so far shows that the ad tier mainly attracts people who weren't paying at all — password sharers, or people who had cancelled. Only about 15 percent of ad-tier subscribers came from the standard plan. The rest are incremental. So Netflix is growing its total revenue per household, even if the average per subscriber dips slightly. Luna: That's the key metric: revenue per household. Not just revenue per subscriber. Lucas: Right. And that's why Wall Street is bullish on Netflix even as subscriber growth slows. In Q2 2026, Netflix added 2 million subscribers, but revenue grew 14 percent year-over-year. That's pure pricing power. They're making more money from the people they already have. Luna: So what's the one concrete thing you want listeners to take away from this episode? Lucas: That pricing power isn't just about raising prices. It's about creating multiple price points that capture different segments of demand. Netflix has nine tiers, but they're really selling three things: convenience, price sensitivity, and access. Each tier targets a different willingness to pay. And they've built a data moat that makes switching costly. That's the playbook. Luna: And the password crackdown was the masterstroke. It turned non-customers into customers without a single price change. Lucas: Exactly. It was a pricing change disguised as a policy change. And it added 30 million subscribers. So the next time you hear a company say 'we're updating our terms of service,' ask yourself: is this actually a price increase in disguise? Luna: Good question. I'll be watching for that. Lucas: That's it for this episode. Join us next time on Pricing Power Podcast.