Netflix (NASDAQ:NFLX) investors mostly saw the streaming giant's second-quarter glass as half empty rather than half full, given Wednesday's post-earnings stock price pullback of a little more than 3%. Share prices were down again (albeit slightly) on Thursday on lingering worries that the company's high-growth days are now completely in the past. The company only added 1.54 million paying subscribers during the three-month stretch ending in June, and its customer-growth forecast of 3.5 million for the quarter currently underway was equally concerning to the stock sellers.

There is at least one aspect of the company's second-quarter earnings report, however, worth celebrating. That is, Netflix has been able to impose price increases that outpace its rising costs, leading to widening per-user profitability.

a person sitting at a table holds a coffee cup while viewing a video on a tablet computer resting on the table in what appears to be a coffee house

Image source: Netflix.

The math on Netflix subscription pricing works

It's the stuff of ongoing debate. Some investors fear higher prices will make Netflix's service less marketable. Others believe consumers still see plenty of value in Netflix's offerings even at a higher price. It's likely there's at least a little truth to both ideas.

By and large, though, thus far the company has proven it's got more than enough pricing power to keep raising its monthly rates.

The graphic below puts things in perspective, plotting the average monthly revenue collected from subscribers in each major market sector. The company's customer head-count growth is assuredly slowing down, but it's still growing despite ongoing -- or even relatively new -- rate increases everywhere except for Latin America.

The monthly price of Netflix service has been steadily rising for years.

Data source: Netflix. Chart by author.

But that's not the whole story. Far more compelling is the fact the company's weighted-average revenue per user is significantly outpacing the average per-user cost of offering its streaming service.

Take a look. As of the end of the second quarter, Netflix is collecting an average of $35.01 per quarter per customer, led by U.S. consumers in terms of the total number of customers and the amount paid per month. However, the company only spent $26.36 per quarter per user -- a figure that's been falling since 2019. Simply put, scale is starting to make a measurable difference in Netflix's profit margins.

Netflix's per-user operating costs have been shrinking even as ARPU has been on the rise.

Data source: Netflix. Chart by author.

There are a couple of noteworthy footnotes to add to the discussion. One of them is the fact that Netflix has spent less on marketing since COVID-19 took hold, perhaps believing bored consumers would find them while shut in at home. Second, the relative growth of the company's cost of revenue has also been slowed, at least partially due to production shutdowns stemming from the pandemic. Only time will tell to what extent this spending is restored to pre-COVID levels.

Take another, closer look at the chart above, though. Operational spending per user was leveling off as far back as 2018, already widening per-user margins before the coronavirus contagion took shape. This was always the bigger plan.

Not all change is bad

Don't misread the message. Netflix has plenty of questions to answer for investors. Chief among them is whether or not last quarter's and this quarter's tepid subscriber growth figures are the new norm or just a blip born from the extraordinary circumstances of the pandemic. Given the advent of rival streaming services like AT&T's HBO Max and Disney+ from Walt Disney, it's a question well worth asking.

Current and prospective Netflix shareholders, however, can at least take some solace in the fact that the math of this particular business model works. The company is generating decent income on the revenue it's able to drive, turning a top line of a little more than $7.3 billion last quarter into net income of $1.35 million -- figures similar to Q1's. Even if it shifts from being a pure high-growth name to something more along the lines of a recurring revenue/cash cow sort of play, the bullish argument still holds water. It just holds it in a different way.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.