After Netflix (NASDAQ:NFLX) announced a price hike this week, the inevitable questions began, such as "How much is too much?" The streaming giant last increased the cost of a subscription in October 2017, and its customer base continued to soar. This latest round of increases begins immediately for new subscribers and will be rolled out to existing customers over the next several months.
To assess the potential for subscriber cancellations, independent news site Streaming Observer, which focuses on cord-cutting and streaming television, commissioned a survey of Netflix subscribers in the U.S. The purpose of the study was to "gauge [subscribers'] reaction to the latest round of price increases." Some of the findings might surprise you.
Of those surveyed, 71% said they would maintain a Netflix subscription after the recent price increase. This compares favorably with the 27% that said they "might" or "will definitely" cancel. Breaking that down even further, only about 3% said they "will definitely cancel," while about 24% said they "might."
Among those who plan to continue with Netflix, about 61% don't plan to make any changes, while 10% said they planned to downgrade to a lower-priced plan.
A somewhat surprising finding of the survey is that at least some customers are interested in an ad-supported version of Netflix, whereas in the past, users were adamant that they would cancel if the company added advertising, according to the report.
When asked if they would consider a discounted, ad-supported version of Netflix, 35% said "No discount is enough" to consider watching advertising. The remainder were widely split on how much of a discount they would require to tolerate watching commercials -- 15% said they'd want the service for free, 8% needed a 75% discount, 29% wanted a 50% discount, and 13% would require 25% off in order to put up with ads.
Chris Brantner, founder of Streaming Observer, addressed the issue in a statement to The Motley Fool:
[An] interesting point here is that people are expressing interest in an ad-supported model. In the past when people thought Netflix was going to start playing commercials, subscribers flipped out. However, as prices continue to rise, it might be worth Netflix's while to look into potential ad revenue that could be generated on a cheaper plan.
Much ado about nothing
With 27% of those surveyed at least considering cancellation due to the price hikes, it might initially sound like Netflix has made a grave error, but that's probably not the case.
Brantner said that people are typically unwilling to admit they'll tolerate price hikes. "When Netflix has raised prices and subscribers expressed outrage, analysts projected the number of people who'd actually follow through was only between 3-4%, making the price increase quite profitable."
That view is supported by UBS analysts. Netflix instituted the first of two $1 price increases in May 2014, with the second taking effect in October 2015. Existing subscribers were grandfathered into their existing price plan for two years. In May 2016, those subscribers were about to get hit with a $2 per month price increase, with the cost rising from $7.99 to $9.99.
UBS analysts conducted a survey in April 2016, asking subscribers about the upcoming rate hike. At the time, a full 41% of those surveyed said they would accept no price increase from Netflix. This seemed to indicate that the company would soon be decimated with a wave of subscriber cancellations. In the second and third quarters of 2016, however, Netflix subscribers increased 11% and 10% year over year, respectively. So what happened?
Breaking up is hard to do
In a note to clients that year, UBS noted the following phenomenon (emphasis mine):
For those less familiar with how consumers typically respond to survey questions regarding subscription service price increases, it is uncommon for consumers to admit they are willing to pay more for most services.
They go on to use cable as an example, where 68% say they are unwilling to accept "any" price increases, though prices have been rising between 3% and 5% every year, while the industry continues to lose only 1% of its customers each year. In the end, UBS estimated that roughly 3% to 4% of the affected subscribers would drop the service, consistent with Brantner's view.
The best bang for your buck
While there's always a chance that subscribers will bail when a rate hike is announced, the reality is that the majority of customers won't. Netflix still gives subscribers a lot of viewing for their dollar -- and without commercial interruptions.
Considering the buzz that's been generated lately by Netflix's movie triumph Bird Box, the interactive hit Black Mirror: Bandersnatch, and its haul of five Golden Globes, subscribers are still getting more bang for their buck from Netflix than from any other streaming service.
Check out the latest Netflix earnings call transcript.