How Netflix Lost 800,000 Members and Good Will

HOW NETFLIX LOST 800,000 MEMBERS AND GOOD WILL

“$28 in late fees, that lousy movie we saw was certainly not worth it. We are no longer coughing up those late fees and high rental fees for a Friday night movie” This was way back in 1997, we were tired of Blockbuster, its high pricing and unreasonable late fee charges. But there were hardly any other options as Blockbuster almost enjoyed a monopoly, with very limited local competitors in select areas. Then in the year 1998, we heard of an innovative company called Netflix, which offered the convenience of receiving DVD’s in the mail which charged a fixed monthly plan of $10 a month and no late fees. We were so happy to say “Goodbye Blockbuster”. The word spread on the Netflix red envelopes received in the mail with no pressure to turn them in thus eliminating late charges, increasing subscriber base tremendously.

I have been a customer of Netflix since their founding days. There are times in the year when life gets so busy, a DVD stays in our home for months but we value the convenience offered by Netflix so much that we continue to pay their fixed monthly fees for the DVD rental plan. Netflix subsequently added the convenience of online streaming as a bundle for all subscribers which enhanced their value offered tremendously. Since the time lag in waiting for a DVD rental to arrive in the mail was eliminated, subscribers could watch movies instantly over the internet using streaming technology. Subscriptions went up even further to 22 million and Netflix stock peaked.

However after Sept 2011, Netflix raised the price of their DVD rental and online streaming plan to $16 and their customer base failed to realize any marginal utility from this 60% increase in price. Subscriptions went down by an astounding 800,000 in a quarter. As per the price elasticity of demand, when the price of a service rises, the quantity of it demanded falls. The price elasticity of a service like Netflix is high especially since this service currently has many substitutes that are easily available to consumers. Netflix has some tough competition in the form of other service providers like Apple, YouTube, Amazon and Hulu, which influence