Netflix effectively communicated its plan to increase prices this week, clearly learning from its tumultuous 2011 attempt to boost revenue by hiking rates and splitting its business in two, say communications experts.
The video-streaming and DVD-rental service announced plans to raise prices during a live webcast of its quarterly earnings on Monday. Netflix CEO Reed Hastings told viewers that prices will go up by $1 to $2 per month for new subscribers sometime between April and June, while current members will be able to keep their existing plans for one to two years.
"This time [Netflix] benefited from having done it poorly the first time, so there was room to move up on the positivity meter," says Sabrina Horn, CEO of digital communications agency Horn.
"Generally, human beings don’t like surprises, so Netflix handled it much more effectively with its audience and factored in what potential reactions might be."
In July 2011, Netflix angered consumers when the company said it would increase subscription prices by 60%. A few months later, Hastings sent a mass email to users explaining that the company would split its streaming and mail DVD services, with the latter separated into a spin-off business called Qwikster. Netflix scrapped the Qwikster plan within a month, and Hastings apologized for how he explained the changes, saying he "messed up" and owes "everyone an explanation."
Horn says Netflix took existing customers into consideration this time and rewarded them, which helped ease backlash for the future price increase.
Netflix representatives declined to comment on the issue.
Three years ago, "it seemed like the CEO was communicating from his own instincts," while now it appears as if Netflix heeded internal communications strategies to announce the news, notes Jason Schlossberg, president and partner of Kwittken + Company.
Since announcing the hike in prices on Monday, Netflix has not posted anything about the price increases on its corporate blog, Facebook page, or its @Netflix Twitter handle. The brand has responded to tweets related to the price hike through its @NetflixHelps account, with messages such as, "These changes will enable us to get more content. Existing members will stay at current price for a generous time."
"If Netflix feels it can justify the price increase, especially with new customers who have not chosen to subscribe yet, there is no reason to explain why the price has gone up," says Schlossberg.
He adds that the world is very different than it was in 2011. Consumers three years ago may have thought of Netflix as more of an additional benefit for the house, but now it has "really become a fundamental lifeline for people" to consume content.
Similarly, Horn thinks Netflix should not post additional information on the price changes because it should not "fix it if it’s not broken." She adds that the company’s communications with consumers have worked so far.
However, Alan Marcus, SVP of Shift Communications New York, says Netflix’s social channels offer the company a "huge opportunity to continue to amplify the great messaging" it has done to this point.
Through social, Netflix can further talk to consumers and use the price increase as a way to engage them on other topics, such as new programming they would like to see.
Marcus adds that the service’s original shows, such as House of Cards and Orange is the New Black, offered consumers "much greater context and rationale for the price increase this year."
The ability to offer customers exclusive, high-quality content gives Netflix a much more robust story to tell about why the subscription rate is going up, he says. It also helps that the price increase is much lower this time than 2011, so "what the paying customer is getting in return is far superior if you think about it from a cost-benefit standpoint," Marcus explains.
Morningstar senior analyst Peter Wahlstrom says "the company has a bit more pricing power than it actually realizes or is willing to exploit at this point" because of its mishap in 2011.
"If they can be strategic and be long-term-greedy versus trying to capture it all upfront and right away, that is going to be a better approach," he explains.
Jason Clarke, VP of marketing and business development at Text100 – who says he is willing to pay the additional money himself as a Netflix user – explains that the way the service delivered the news on the earnings call was very important.
"[Netflix] needed to show that this price increase is associated with positive earnings so consumers can understand that this is a business that is moving forward," he says.
Clarke adds that it seems like Netflix has learned from its past experiences by showing consumers respect. The brand has talked about possibly raising prices for several months and it’s delaying when the increase officially takes place.
The economy has also changed in the past three years, with Wahlstrom noting that "people are feeling incrementally better."
Several months after announcing the first price increase, Netflix said it lost 800,000 US subscribers in the third quarter of 2011, and the company’s stock dropped more than 25% in after-hours trading on the day of that quarter’s corresponding earnings report.
Wahlstrom says "we will ultimately see how sticky that Netflix customer is," but it will take longer to play out since the price increase will kick in for customers at different times.