In 2011, Netflixcustomers' service fees increased by 60%.Netflixdiscontinued a subscription offering DVD rentals and unlimited video streaming for $9.99 per month;DVDsand streaming would be separated, with each costing subscribers $7.99 a month ($15.98 for both). This strategic decision occurred as video streamed via the Internet was slowly replacing discs. However, now customers wanting both services had to juggle two accounts, andNetflixlost around 800,000 subscribers. Assume that you are director of product pricing at a firm offering a video streaming platform that allows subscribers to view and download content over the Internet. Competitors are currently producing substantially the same product as yourfirm-videostreaming services only. You have realized that, to remain competitive, your company must both continue adding content and move into areas of new and original content. Current profit margins, based on an annual subscription cost that is uniform across all markets, will not cover fixed costs associated with moving into original film production.
To finance new original movies, you are considering revisions to your firm's pricing structure, and you have invited senior executives together to present your ideas. Using the analytical framework described in Chapters 3 and 4, you are asked to provide convincing evidence of the need to revise subscription rates, and to demonstrate the conditions under which a decision to revise prices would increase the net benefit to the firm, of current and future subscriptions, by performing the analyses described in the Tasks. Responses should be 600 words.
TASKS
As the Director of Product Pricing:
- Explain how regression results and arc elasticity measures can be used to derive measures of elasticity, which can then be used to estimate demand.
- Across (a) personal and (b) business users of this product (assuming that business users have more inelastic demand), apply own elasticity of demand as a quantitative tool to forecast changes in revenues, prices, and/or units sold.
- Assess how differences in elasticity regionally or across interest groups could change a consumer's equilibrium choice in response to changes in prices and income.
- Assess the possibilities of addressing dissatisfaction among existing subscribers, through "messaging," "buy one, get one free" deals, gift certificates, or some other tool introduced in Chapters 3 and 4.