Netflix's Pricing Strategy Works as Margins Improve

Netflix’s share price reached an all-time high on Thursday after the company decided to raise prices for (some of) its subscribers in the United States. The latest price hike, the third since the company started offering a standalone streaming option in 2011, will affect the standard tier ($10.99 instead of $9.99) as well as the premium tier plan ($13.99 instead of $11.99) while the entry-level plan will remain unchanged at $7.99.

While subscribers may not be happy to see their monthly bill increase, Netflix’s shareholders certainly seem to back the company’s decision. After all, higher prices equal higher revenue, assuming that the number of cancellations won’t be too high. In the past, the company’s subscriber growth may have slowed down following price increases but it never turned negative. Over the past six years, the company’s contribution profit from domestic streaming, i.e. revenues minus costs that are directly related to the segment, increased nearly five-fold, while the contribution margin improved from 23 percent in 2012 to 36 percent in 2016.