Netflix (NFLX 2.50%) announced to shareholders in April that the company had lost 200,000 subscribers in Q1 2022. The company's stock price plummeted by more than 35%, losing $54 billion in market cap in 24 hours. Netflix co-CEO Ted Sarandos has since described the event as "horrifying, disappointing, and embarrassing." 

Since then, the company has been reorganizing its priorities and looking at new avenues to increase revenue, including cracking down on password sharing and bolstering plans to unveil an ad-supported tier to its subscription offering, in response to increasingly fierce streaming competition. Here's why the company could seriously benefit from both these new strategies.

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Giving consumers what they want

Before 2022, Netflix had long denied that it would ever introduce ad-supported services on its platform, with co-CEO Reed Hastings even saying the practice was "exploiting users" in a Q4 2020 earnings call. Now, times have changed. Consumers increasingly demand ad-supported options, resulting in both Netflix and Disney+ announcing earlier this year that each would be offering ad-supported tiers in the future.

In the wake of the COVID-19 pandemic and the rising cost of living worldwide, consumers are beginning to tighten their discretionary spending. A TV study from entertainment researcher Hub recently revealed that more than 50% of subscribers from Hulu, Paramount+, and Peacock had chosen ad-supported options over the higher-cost ad-free subscriptions.

Additionally, a Comcast (CMCSA 0.14%) earnings call in Q4 2021 showed that 80% of Peacock subscribers prefer ad-supported services over the more expensive ad-free offerings. The company's CEO Brian L. Roberts also pointed out that ad-free subscribers tend to cancel their memberships at a lower rate, making the choice between ads or no ads a win-win for streamers and their viewers alike. 

An ad-supported tier would open Netflix to viewers from a wider variety of economic backgrounds both on their home turf and abroad, increasing subscriptions and allowing the company to offer its service at a lower price without affecting the bottom line. 

Depending on how many ads Netflix plans to show per hour in its ad-supported tier, the company has the potential to increase its ARPU substantially. In Q4 2021, the company averaged $14.82 ARPU in the US and Canada. Comparatively, ad-supported Roku (ROKU 4.47%) reported an ARPU of $41.03 in the same quarter with fewer active accounts than Netflix. 

Same subscriptions, more revenue

Cracking down on password sharing has similar potential to improve Netflix's top and bottom lines. In Netflix's letter to shareholders in April 2022, the company said, "In addition to our 222 million paying households, we estimate that Netflix is being shared with over 100 million additional households."

In March 2022, the streaming company began testing ways to curb password sharing in Chile, Costa Rica, and Peru, including allowing subscribers to add up to two people to their account, "each with their own profile, personalized recommendations, login, and password," for $2.99 or less per month. If Netflix can convert all of its password-sharing users into sub-accounts, it could increase its annual revenue by at least $3.58 billion – 12% of the company's 2021 annual revenue. 

A study by intelligence company Morning Consult shows that 33% of streaming subscribers are willing to pay extra to share their passwords. Even if only one-third of Netflix's 100 million password-sharing users sign up for the new option, the company will still bring in an additional $1.18 billion of revenue annually. 

Between its password-sharing crackdown and a price increase in January, Netflix does risk alienating a portion of its customers. The company predicts a loss of 2 million subscribers in Q2 2022. But the probable subscriber gain from an ad-supported tier and paid sub-accounts gives Netflix the potential to return to subscriber growth. Members priced out of the platform at the beginning of this year could return once the company introduces its lower-priced ad-supported tier.

Can Netflix retain its position at the top going forward?

Netflix is now finding its footing in a $372 billion market that has vastly changed from what it was even two years ago. Streaming competition has become fierce, a pandemic temporarily skyrocketed viewership, and now consumers are increasingly requesting ad-supported services to ease living costs. 

Looking ahead, it would be prudent for streaming service stock investors to keep an eye on subscribers in the US and abroad attracted by the soon-to-be-released ad-supported tier, and to monitor the increasingly important ARPU to see whether the company is able to earn more revenue from both ads and password-sharing accounts.