Economics Versus Marketing at Netflix

My posting on the price increase at Neflix was picked up at Business Pundit, which generated some discussion at Brand Autopsy and Ensight.

Their points are that price increases are inevitable, especially since a business's costs go up each year even if they don't increase capital investment (payroll, insurance, etc.). So raising prices is inevitable.

I agree, but my point in was more a branding issue than an economic one: If Netflix needs to raise prices, they should have done it in a way that would have locked in customers in what is a very new business model.

The business of renting DVDs by mail for a flat fee is fairly new. There is no patent on this business model (a discussion in itself), so Walmart, Blockbuster and other large companies have announced plans to enter this space. There is a good chance that Netflix could be squeezed out (my bet, bought out), or that they will become the "Apple Computer" of this consumer segment: an early pioneer with a small, dedicated fan base, but with market share in the single digits and prices that are higher (I should blog about the same thing happening to Tivo).

I thought a "pay 12 months in advance at the old rate" was a nice way to raise prices while locking in the current customer base. Those who want the old price paid in advance for it - and cash up front to a company is better than a price increase - and those who didn't want the pre-paid service paid a higher monthly price.