In general, customers begin threatening to cancel a service because of increasing prices long before they actually do.
Netflix’s 2016 price hike is a perfect example. At the time,analysts at UBS surveyed customersand 41% said they would acceptnoprice increase for Netflix.None. But UBS estimated that roughly 3% to 4% would actually cancel.
“41% of respondents in our survey were not willing to accept any price increase for Netflix, which is actually very positive when compared to 68% for pay TV,” the analysts wrote at the time. “Consider pay TV costs have been rising 3-5% annually and the industry is now losing only ~1% of customers each year, relative to 68% of pay TV customers in our survey indicating no tolerance for price increases.”
People simply don’t like the idea of price increases, but often tolerate them when they happen.
Now Netflix has raised prices again,introducing its biggest price hike ever this week, which raised the cost of its most popular plan from $11 to $13. Its lowest tier is now $9, while its highest is $16.
Wall Street isn’t worried people will cancel.
“We are bullish on the company’s ability to execute the pricing increase,” Stifel analysts wrote last week.
Compared to its competitors, “Netflix still offers the best value, even at these higher price points,” RBC analysts argued.
The RBC analysts elaborated:
“There is the basic point that Netflix offers a flat-out compelling value proposition – a massive content catalog with an increasingly large amount of original content at a very low price. You and a date want to go out to the movies Gonna cost you $17.66 at your local U.S. movie theater (average price per tick of $8.83). Or you could Netflix and chill and watch Bird Box for … effectively way under a dollar (depending on how much time you spend on Netflix during a typical month). And you can use the $16 in savings and buy a nice Chianti … So yes, we believe the price increase will stick.”
This view seems to be backed up by Netflix’s own projections for subscriber growth in the first quarter. Netflix estimated that it wouldadd 8.9 million paid subscribers this quarter, topping Wall Street estimates that it would give guidance of 8.5 million.
But Netflix can’t raise prices indefinitely without any effect. There issomeprice at which customers will actually start to revolt. And new survey data suggests Netflix will face its next big challenge at $15 per month.
Business Insider used SurveyMonkey Audience to ask at what price people would consider canceling their Netflix account.
Here is a chart of what we found:
As you can see in the chart, there is a big jump when you hit $15, from 22% considering canceling at $14 (or below), to 52% at $15. (Currently, Netflix’s highest tier price is $16 per month, but it’s much less popular.)
Just because these Netflix subscribers areconsideringcanceling doesn’t mean they will. But it does demonstrate that there seems to be a psychological jump at $15. That’s perhaps a reason why HBO’s standalone service, HBO Now, is priced at $14.99.
And for Netflix, a similar jump also happens between $19 (64% would consider canceling) and $20 (85% would consider canceling).
Netflix has indicated that it will periodically raise prices, but hasn’t said whether there will be a price ceiling. The company did say on its earnings call that it hopes to one day be able to self fund without relying heavily on debt.
To get there, Netflix will have to balance subscriber growth and price hikes. And these survey results suggest that certain price points might be more difficult for customers to stomach than others.
But Wall Street sees a path. At least15 firms raised their price targets following Netflix’s Q4 earnings.
Here is more detailed info about how the survey was conducted:
“SurveyMonkey Audience polls from a national sample balanced by census data of age and gender. Respondents are incentivized to complete surveys through charitable contributions. Generally speaking, digital polling tends to skew toward people with access to the internet. SurveyMonkey Audience doesn’t try to weight its sample based on race or income. Total 1,095 respondents, a margin of error plus or minus 3.11 percentage points with a 95% confidence level.”