Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Netflix Prices the Subscription for Everyone
Transcript
- Lucas: So Netflix reported earnings last quarter, and buried in the release was this detail: the ad-supported tier now accounts for over 40 percent of new sign-ups in the markets where it's available. Which is a pretty dramatic shift for a company that spent a decade insisting it would never run commercials. Luna: Right, I remember when Reed Hastings called advertising a 'lazy way to generate revenue.' That aged well. Lucas: It really did not. And it's worth asking why Netflix changed its mind. Because the conventional story is that subscriber growth stalled and they needed a new revenue lever. But the actual pricing logic is more interesting than that. Luna: Before we get into the weeds — I've been thinking about this, and if these conversations have moved your work forward in any way, we'd love it if you considered supporting the show. It's listener-supported, no ads, and it keeps us independent. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, absolutely. Every bit helps us keep digging into these stories. So, back to Netflix — the key question is how they priced the ad tier. They launched it at $6.99 in the US in November 2022. At the time, the cheapest ad-free plan was $9.99. So the discount was thirty percent, but it wasn't a fire sale. Luna: Thirty percent seems significant but not desperate. I wonder how they landed on that specific number. Lucas: Exactly. They had to consider two things: the price sensitivity of the people who had already cancelled or downgraded, and the willingness of existing ad-free subscribers to switch. If the ad tier were too cheap, they'd cannibalize their higher-revenue customers. Too expensive, and it wouldn't attract the churned users. Luna: So they're basically segmenting the market. The ad tier captures the price-sensitive folks who were about to leave, while the ad-free tiers charge a premium for the convenience of no interruptions. Lucas: Precisely. And they've since raised the ad-free prices. Standard ad-free went from $15.49 to $15.99, premium from $19.99 to $22.99. So the spread between the ad tier and the standard plan is now nearly nine dollars. That's a huge gap, and it's intentional — it nudges people who can afford it to stay on the higher tier, while still keeping a low entry point for new users. Luna: Huh. So the ad tier isn't just a retention tool. It's also a price anchor. Makes the ad-free plans feel more valuable by comparison. Lucas: Exactly. Behavioral pricing 101. But there's another layer: the ad tier itself generates revenue from advertisers. Netflix doesn't disclose ad revenue publicly, but analysts estimate it's somewhere between six and eight dollars per subscriber per month in the US. Which means Netflix might be making almost as much from an ad-tier user as from a standard ad-free user, once you factor in the ad revenue. Luna: Wait — so the ad tier could actually be nearly as profitable? That changes the calculus completely. Lucas: It does. If the ad revenue per user approaches the subscription fee, then Netflix has essentially created a second revenue stream from the same customer base. And the cost to serve an ad-tier user is slightly higher because of the ad delivery infrastructure, but not dramatically so. So the margin profile might be similar. Luna: That makes the password-sharing crackdown even more interesting. Because they're now converting those free users into either ad-tier subscribers or paid sharers. It's like they're monetizing every possible segment. Lucas: Right. The password-sharing policy launched in 2023, and it added about 13 million subscribers in the first two quarters. Many of those were former borrowers who chose the ad tier. So Netflix used the crackdown as a pricing mechanism — effectively raising the price for people who were getting the service for free, but offering them a low-cost option to stay. Luna: It's a smart bundling of enforcement and pricing. But I wonder about the long-term pricing power. Streaming is a commodity now. Disney, Max, Amazon, Apple — everyone has content. What stops Netflix from becoming a low-margin utility? Lucas: That's the billion-dollar question. Netflix's answer is scale and data. They have 270 million subscribers globally. That gives them a cost advantage in content production — they can spread a $200 million movie over a huge base. And their recommendation algorithm reduces churn by keeping people engaged. Both of those are pricing moats. Luna: So they can keep raising prices as long as they keep producing hit shows and the algorithm keeps people hooked? Lucas: To a point. But there's a limit. The ad tier is really their hedge against that limit. If they ever hit a wall on price increases for the ad-free plans, they can still grow revenue by adding more ad-tier users and selling more ad inventory. It's a dual-engine model. Luna: I want to go back to that $6.99 launch price. Why not five dollars? Or eight? Lucas: Great question. There's some research from pricing consultants that the sweet spot for a 'budget' streaming tier in the US is between six and seven dollars. Below that, you risk devaluing the brand. Above that, you lose the price-sensitive cohort. Netflix likely tested this with focus groups and historical data from their own churn patterns. They knew exactly what price point would maximize the combination of new sign-ups and minimal cannibalization. Luna: So it's empirically driven. Not just a gut feel. Lucas: Right. And they've been tweaking it. In some markets, they've lowered the ad tier price to match local purchasing power. In India, the ad tier is about $2.80. In Brazil, $4.20. They're adapting the price to the local market's willingness to pay while keeping the ad-free premium consistent. Luna: That's fascinating. So the ad tier isn't a one-size-fits-all product. It's a flexible tool for global price discrimination. Lucas: Exactly. And that's really the core of Netflix's pricing power. They have the data to segment not just by country, but by user behavior. They know how often you watch, what genres you like, whether you're likely to churn. They can target offers and price increases with surgical precision. Luna: But isn't there a risk of a backlash? When they raised prices in early 2023, there was a lot of noise on social media. Lucas: There was. But churn barely budged. Because for most subscribers, the value of the service still exceeds the cost. The price increase was $1 to $3 per month. That's less than a coffee. The switching costs — losing your watch history, recommendations, and the hassle of finding a new service — are higher than most people realize. Netflix is pricing right up to that switching cost threshold. Luna: So the real pricing power comes from the stickiness of the product, not just the content. Lucas: Bingo. The content gets them in the door. The algorithm and the user interface keep them there. And the pricing strategy extracts the maximum value from each segment without pushing them over the edge. It's a textbook case of value-based pricing applied to a subscription business. Luna: One more thing — the recent decision to end the basic ad-free plan in the US and Canada. That forced people onto either the ad tier or the standard plan. What was the thinking there? Lucas: Simplification and upselling. The basic plan was $11.99, but it only offered one stream and 480p resolution. It was a weird middle ground. By eliminating it, Netflix pushes the fence-sitters either to the $6.99 ad tier or the $15.49 standard plan. Either way, Netflix wins — either they get the ad revenue from the budget-conscious, or they get the higher subscription fee from the quality-conscious. Luna: It's like they're eliminating the option that was neither cheap enough for the price-sensitive nor good enough for the quality seekers. Clever. Lucas: It is. And it shows how Netflix is willing to make bold pricing moves even as the streaming market matures. They're not resting on their subscriber count. They're actively managing the mix of ad and ad-free users to maximize long-term revenue per user. Luna: So what's the next frontier? Where do they go from here? Lucas: I think we'll see more bundling — Netflix already bundles with some telecom providers. And potentially a super-premium tier with lossless audio or early access to content. They have room to expand the pricing ladder upward because the top end of the market is underserved in streaming. People who want the best quality and are willing to pay are currently capped at $22.99. That could easily go to $30 or more if they add enough value. Luna: So the future of Netflix pricing is more tiers, not fewer. And more data-driven personalization of those tiers. Lucas: Exactly. And if they execute it well, they'll maintain their pricing power even as competition intensifies. It's a reminder that in a subscription business, pricing is not a one-time decision — it's a continuous strategy of segmentation, testing, and adjustment. Luna: I think that's a really useful lens for any business, not just streaming. Thanks, Lucas. Lucas: You bet. And thanks to our listeners. We'll be back next time with another deep dive into how businesses set prices that win.