3 factors impacting Netflix’s next price hike

Netflix may want to take extra considerations before raising prices again.

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A couple watch the office on Netflix

Image source: Netflix

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Netflix Inc (NASDAQ: NFLX) raised prices in the US, Canada, and the UK at the end of 2020, and price hikes in other regions could well be in the works, too. But Netflix has more opportunities to grow its subscriber base outside of the US, where it hasn't offered its service as long and won over the majority of its addressable market.

Price increases are an important piece of Netflix's revenue growth in the US, but at $13.99 per month for its most popular plan, management may need stronger-than-usual cues from consumers that they're willing to pay more before it raises prices again.

Netflix's pricing strategy

Chief operating officer Greg Peters reminded investors how the company thinks about price increases during Netflix's fourth-quarter earnings call. "We are looking for signals and signs from our members that are telling us essentially that we have added more value," he said. "So you think about engagement with the service and retention and churn characteristics, acquisition."

When Netflix sees a meaningful improvement in those numbers following its most recent price hike, it'll go back and raise prices again. But Netflix may want to pay attention to several other factors before it raises its prices again in the US. As it faces more competition from Walt Disney Co, AT&T Inc, and other media companies shifting content to streaming, it may want to monitor the overall streaming market to determine what consumers can absorb.

Here are three factors for Netflix and its investors to consider when assessing the potential for another price hike in the US.

1. Differentiation

Netflix can't consider the value it offers consumers in a vacuum; it needs to consider the amount of value it offers that consumers can't get anywhere else. With more competitors entering the market at lower price points, savvy consumers may be able to replace content from one streaming service with the same or similar content on another.

To that end, Netflix already offers a lot of original and exclusive content. Thirty-nine per cent of its TV catalogue is composed of original series, according to data from Reelgood. That's more than HBO Max, Disney+, and Hulu. Additionally, 83% of its content library is unavailable on any other streaming platform. Only Disney+ holds more exclusive rights as a percentage of its service.

Those numbers will only continue to climb for Netflix in 2021 as it continues to shift its content investments to originals. In its fourth-quarter letter to shareholders, the company said it has 500 titles currently in post-production.

2. Competitor results

2021 may be an opportunity for Netflix to pay close attention to how its competitors are performing. While management has historically tried to ignore what the competition was doing and focus on its own operations, competitors' results may provide additional insight into consumers' willingness to pay for streaming content.

First, Disney will raise the price of Disney+ and its three-service streaming bundle by $1 at the end of March. It'll also raise the price in Europe by $2, but add additional content under the Star brand. With the sizable audience Disney has built for the service in just over a year, the price hike could provide additional insights into how consumers respond to a modest price increase.

Second, HBO Max is debuting WarnerMedia's entire 2021 film slate with limited runs on the streaming service. Investors should pay attention to HBO Max activations and retail subscribers, as well as any commentary on churn rates. That could provide insight into consumer willingness to pay a premium price for premium streaming content. HBO Max costs $14.99 per month, $1 more than Netflix's most popular plan.

It may seem counterintuitive to see positive results for Netflix's competitors as a positive for Netflix, too. But considering the ongoing shift of time spent watching video from live TV to on-demand streaming, there's room for multiple winners.

3. Overall willingness to pay for streaming

Netflix already offers one of the most expensive subscription video-on-demand services in the US. Its premium plan, which includes four simultaneous streams and 4K video, is $17.99 per month. Even if Netflix offers more originals and exclusives than its competitors, consumers might not be willing to pay just to access a big catalogue of content.

After all, that's the idea behind cord-cutting. Consumers simply aren't willing to pay the premium price for access to premium content. Netflix may offer "incredible entertainment value" as Peters points out, but at some point, consumers simply might not be willing to pay the price tag. 

Still, at less than $20 per month, it's a far cry from the price of a standard cable bundle. And as cord-cutting accelerates, there's more room in the budget for streaming. Of course, the goal of cord-cutting is to save money, so Netflix still has to keep its price attractive while providing enough content to convince people they can cancel their cable subscriptions.

It seems very likely Netflix will raise prices in its largest and most valuable market again at some point in the future. Positive signs from the three areas mentioned above mean the media company could raise prices sooner rather than later. Overall, a $1 per month price hike in the U.S. and Canada would translate into about $900 million in additional revenue, which will mostly go straight to Netflix's bottom line and free cash flow.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article represents the opinion of the writer, who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Adam Levy owns shares of Netflix and Walt Disney. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Netflix and Walt Disney. The Motley Fool Australia has recommended Netflix and Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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