What Is the Netflix Pricing Strategy?

Netflix (NFLX) had fewer-than-expected new subscriber additions in fiscal 2Q16. It had net additions of only 0.16 million members in the United States, which was far below its internal forecast of 0.50 million members. It also saw an increase in churn.

Netflix stated in a 2Q16 letter to its shareholders that one reason for the increase in churn could be that some domestic subscribers may have “perceived the news as an impending new price increase rather than the completion of two years of grandfathering.”

Netflix was asked about its pricing strategy at the Goldman Sachs Communacopia Conference last month. The company said, “I think most of the learning for us have been at the execution the micro level. At the macro level I would say our thesis is intact that we think as we add more value and add more content to the service, we can raise ASP slowly over time and we do that through two primary mechanisms.”

The company explained how it does this is by offering its subscribers a variety of price tiers so they can choose the tier they want. It offers more value at the higher-priced and middle tiers. The company reiterated that it expects to increase its ASP (average selling price) over time and hopes to deliver more value to its subscribers for the price.

As you can see in the above graph, Netflix’s plans average around $10 per month, and Hulu’s online television service is expected to cost $35 per month. Time Warner’s (TWX) HBO Now and Dish Network’s (DISH) Sling TV are priced at $15 and $20 per month, respectively.

Netflix admitted at the conference that while it was underpriced compared to its peers, it believes this underpricing has been “balanced to some degree in terms of the price that consumers have been anchored on Netflix.”