Should Netflix, Inc. Charge $8.99 or $9.99 a Month?

Netflix hit new highs last week, but keeping the good times going may be a challenge.

Jan 27, 2014 at 4:05PM

Last week was a great one for Netflix (NASDAQ:NFLX) shareholders. The leading video service bucked the market's decline, soaring 17% on the week after posting blowout quarterly results. However, perhaps the biggest reason for the pop in price came from suggesting that it will eventually increase the monthly rate for its stateside subscribers, a move that it pulled off earlier this month in Ireland. 

This is a pretty big deal. Netflix now has more than 44 million subscribers, a figure that should top 48 million by the end of March. Even a modest uptick from the current $7.99 a month could lead to dramatic bottom-line results. After all, Netflix prefers to structure its content licensing deals based on established payments. If Netflix is able to grow its subscriber base or milk more revenue out of its users, the incremental revenue flows mostly down to pre-tax profitability.


Until April of last year, the market was worried that Netflix's average revenue per user would be gradually working its way down to $7.99 a month as more of its DVD-based customers paying more than that downgrade their plans or move on as optical discs fade in popularity. However, in April Netflix rolled out a plan through which a family could stream four devices at the same time for $11.99 a month, double the rate allowed on the standard $7.99-a-month plan.

"That's met our expectations in terms of the family take rate," CEO Reed Hastings disclosed during last week's earnings call.

However, it's not just the wider plan that's leading investors to get excited about Netflix's revenue-generating prospects. It revealed in its letter to shareholders that it's testing pricing to eventually arrive at three tiers. It also went on to explain that existing members will be grandfathered into the old rate on generous terms, a move that implies that the new rates will be higher.

The question now becomes how high Netflix can go before the increase is wiped out by subscriber defections. Netflix has never tested its pricing elasticity, and it remains to be seen if Netflix is too cheap at its current rate. There's no point in going cheaper. is Netflix's closest rival when it comes to streaming smorgabords, and it makes its catalog available at no additional cost to anyone paying $79 a year for Amazon Prime. That's cheaper than Netflix, but it hasn't been enough to slow the leading platform down. After all, in a few months Netflix will likely cross 50 million global subscribers.

However, this doesn't mean that Netflix can spring a double-digit price on its user base. As valuable and addictive as Netflix might be, it would be hard to justify at $12, $15, or $20 a month. It would work for most guests, but too many would simply cancel the service every few months after binge-viewing the content that they wanted. The beauty of $7.99 a month is that it's a rounding error in most family budgets. There's no point in cancelling Netflix for February because the Winter Olympics are coming. This is why Netflix will likely want to keep the increase in the single digits for the basic plan. It could probably charge $9.99 a month and stick with it there for a few years. It can also go for the more modest increase to $8.99 a month, setting the stage for more periodic dollar increases. What do you think? Share your pricing thoughts in the comments box below.

It won't happen overnight. Netflix argued last week that it's in no hurry to roll out new pricing, but now that the cat is out of the bag, let's hope it doesn't sit on the increase for too much longer. With the stock hitting a new all-time high last week, patience isn't going to be Mr. Market's best virtue in assessing what Netflix is worth.

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Longtime Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool recommends and owns shares of and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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