What can SaaS tech business learn from Netflix’s pricing changes? How to develop your pricing over time?

I wanted to write about Netflix pricing for few different reasons. I work with SaaS companies at various stages of development. In most cases, I have to explain to the funders that you need to adjust your pricing policy to where you are at with your company development. You need different pricing when you start, and different on the following stages of the journey. And most of all- KISS, keep it simple & straightforward. But at the same time- SaaS tech companies update their pricing on average every 2–3 years??!!

In recent years streaming services have significantly changed and shaped our trends in spending free time and perception of television as entertainment. Every year we have more options to choose form (Amazon, Apple TV plus, Disney, HBO, Hulu to name just a few). Nevertheless, incessantly number one for 20 years is Netflix. It has become a precursor of streaming services and sets standards for digital content. The company took a DVD rental service and transformed it into a cultural icon worth multibillion-dollar. How did Netflix pricing develop over those years?

Starting with DVD rentals back in 1997, they moved to monthly subscriptions in 2000, followed by “Watch Now” streaming in 2007. Throughout its lifetime, Netflix has consistently been at the forefront of change in the market, also when it comes to pricing logic.

How Netflix price strategy evolved over the years?

Where it all started, in the USA, Netflix now has the most users (73 million, Q2 2020). At the beginning of its operation, the platform attracted customers with a low subscription price and only one pricing plan. At first glance, it may seem that such price solution is too simplistic for such an innovative product. Nothing could be further from the truth! This strategy has allowed Netflix to create huge reach among consumers and build instant awareness. You should remember that back in the year 2000 no one heard of video streaming subscription platforms! Simple pricing was the best solution back then.

Pricing changes came as the company invested more in high-end original series and movies, marketing and technology. As people got the basic concept of what video streaming is about, Netflix was able to develop and address its service to more market segments (4k quality, family plans, simultaneous streaming etc.).

Initially, Netflix introduced the standard module for a price of $8 per month ($7.99 to be precise). However, the increasing demand for new technologies (choose-your-own-adventure format in Black Mirror series) and productions (Stranger Things or The Irishman) gave additional justification for price increases and introduction od new pricing plans. Let’s remember that price entry point remained almost unchanged for 10 years- $7.99->$8.99. This way Nextfilx manags to achive two, seemingly contradicting, goals: positive price perception (how users perceive Netflix’s pricing relative to its competitors) and grow ARPU.

89% of Netflix current users said in a recent survey they would be devastated if Netflix no longer existed. Such a result is a phenomenon on a global scale! Only 11% of respondents said they would not be disappointed. That said, there’s still work Netflix can do. There are three aspects that customers have pointed out for improvement:

· 25% said more content — “Continue to add new stuff that other streaming companies do not have.”

· 19% said lower price — “The price has gotten a little high.”

· 8% said improved search/cataloging — “I would like to be able to personally tailor it.”

The results speak for themselves! When it comes to price level complains- every single company will face a “lowest price” customer segment. But if it’s only single digit % of your customer base, you don’t have to bother too much.

Price discrimination according to Netflix. Is that difficult?

At present, Netflix offers its services in 190 countries. Should pricing differ across geographies? Most of potential customers in Asia or Africa would not be willing to pay as much as subscribers in US and EU.

Therefore, Netflix has become an expert in slimmed-down subscription plans. For example, in India Netflix offers a low-end mobile plan for only $3 a month. Such solutions are also implemented in other Asian countries, such as Malaysia and Indonesia.

Source: ProfitWell
Source: ProfitWell

A good example of price differentiation is the comparison of prices in European and American countries (Source: ProfitWell). For example, in Canada, where users would be willing to pay for Netflix around $13.5, the price of a standard subscription is $8.6 (more than 35% lower). On the other hand, in Sweden, where the willingness to pay is $15.3, the price of the same service is $13.4 (12% lower). Different size of the gap between the willingness to pay level and standard price in those countries shows, that Netflix skillfully controls the price. In some regions, it lowers the price of the service to make it more available, while in others, it increases the maximum margin.

In each of these countries, Netflix is charging less than the market would allow. People in these countries want Netflix bad and are willing to pay. They might not have other streaming services to turn to, so Netflix doesn’t have the same market pressure as in the US. In those markets Netflix wants to improve market penetration, lock-in as many new customers and make Netflix a default streaming service in a country. Data shows that many customers stay with the streaming provider they’ve already signed-up to.

Land and expand- Different Products for Different Audiences

Source: ProfitWell
Source: ProfitWell

Not every user has the same preferences. And not every user has the same willingness to pay. One way to increase the number of addressable users is to create different product packages for different user segments. SaaS products, for example, are usually segmented by user type (personal/hobby, SMBs, scale ups, enterprise).

While the core product is the same for everyone, premium plans come with additional features (that are more relevant for customer segments willing to pay more) and thus a higher price tag. You would see it even more in B2B SaaS.

The core idea behind these different packages is to find features that are proxies for willingness to pay. Screen quality is a perfect example: Users who are willing to spend $$$ on an Ultra HD TV, are probably also willing to spend more $$$ on a video streaming service.

In a way Nexflix follows the old “land and expand” strategy. In Netflix case an individual user signs up for a free trial, then converts to a paid user. And later might migrate to premium service.

Thanks for reading this text. What do you think? Happy to hear your comments. Maciej Kraus