Netflix (NASDAQ:NFLX) has proved time and again that it can raise its prices without much trouble, so long as its content keeps improving.
Each time Netflix takes its content up another notch, it seems to raise its prices. The last time this happened was a year ago, when Netflix raised the prices of two of its three streaming plans by $1 and $2 in October 2017.
In the quarter after the price hike, Netflix defied the odds and reported a record-breaking 8.33 million new global subscribers. The results were proof that its customers are happy to pay up for high-quality content.
So the question isn't if there will be another price hike, but when there will be another price hike.
Netflix's cycle of price increases
Netflix has become a household name in the U.S. for being an affordable way to gain access to a trove of high-quality content. And even with the price increases over the last four years, the standard plan is still just $10.99. That's only $1 more than Spotify and Apple Music subscriptions.
Since the company is using its now $8 billion content budget to create new and exciting features, it earns the right to increase prices by $1 every now and then, Netflix chief product officer Greg Peters said on the latest earnings call. These price bumps also benefit its viewers because Netflix uses that money to invest back into its content and its product. Peters said he views this as a positive cycle that will continue for the foreseeable future.
Here's a brief look at Netflix's price increases for its standard plan since 2014:
|Netflix Price Hikes||May 2014||October 2015||October 2017|
Based on its history of price increases, Netflix subscribers can expect another $1 price hike sometime before next October. This will help fund Netflix's ballooning content budget, which has jumped from $3 billion in 2014 to $8 billion in 2018. Simply put, Netflix would have struggled to fund its 700 shows and films this year without the three price increases over the past four years.
Netflix hints at new pricing models
In the U.S., Netflix currently has a $7.99 basic plan, a $10.99 standard plan, and a $13.99 premium plan. The main difference is how many screens are allowed to share the plan at a time. The basic plan allows for one screen, the standard plan allows for two screens, and the premium plan allows for four.
But Netflix may start to experiment with other pricing models in the U.S. and across other markets, Peters said on the earnings call. The main goal is to create an even cheaper pricing tier that will help speed up its growth across new audiences, he said.
Some investors have speculated that Netflix may introduce a lower pricing tier that will include ads. So if you wanted to pay, say, $4.99 per month, then you'd have to watch a few ads during your shows. This would be worth it for Netflix, because it could bring in pockets of the population that are extra-frugal and might not have signed up for the service otherwise.
But even Netflix's standard $10.99-per-month plan is still quite reasonable compared to its competitors. For example, HBO Now costs $14.99 per month, and Hulu costs $11.99 per month.
Experimenting with pricing is well worth the effort for Netflix. As you can imagine, even a $1 price increase in just the U.S. can make a significant difference, considering Netflix has 58.5 million U.S. subscribers. And so long as Netflix keeps turning out megahits like Stranger Things, Netflix's viewers don't seem to mind the slight price hikes over time.
Natalie Walters has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AAPL and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.