As everyone knows by now, NetFlix spurred a major consumer backlash with its significant pricing increase. As I considered how they might have arrived at this decision, I began to focus on how NetFlix management might have analyzed the value that they provide for consumers. In value-based pricing, companies examine the customer's economics, and they evaluate the cost to the consumer of purchasing an alternative. How would this work for NetFlix? Management would examine the customer's options, and they would calculate how much consumers would have to spend to purchase a service roughly equivalent to the one that NetFlix is offering. If NetFlix executives examined it this way, then you can see why they might have arrived at a decision to raise price significantly.
Some have argued persuasively that they don't see a customer-friendly alternative to NetFlix at the $10 per month price point, with access to new releases and a more extensive library of older movies (which NetFlix provides through a combination of DVDs and streaming). Thus, I can see how the decision was made. It doesn't mean that it was a smart move. They clearly created quite a backlash. Moreover, as Nilofer Merchant wrote yesterday, they might have communicated and executed a price increase in a way that did not set off such a furor.
What will most interesting, though, will be to see what customers do, not what they say on social media. How many will actually follow through on the threat to abandon NetFlix, and where will they turn. NetFlix seems to be betting that the consumer's options aren't all that attractive, and many will end up sticking with the company despite all the complaining. We shall see.