How Netflix's New Prices Are Like Selling Coke on a Summer Day
In 1999, Coca-Cola's then-CEO, M. Douglas Ivester, raised eyebrows when he divulged to a Brazilian business magazine that the popular soda company was testing a vending machine that would charge more when the temperature was hot.
The plan was never put into action, but it does seem to be an antecedent to an idea upsetting people anew this week: Consumers who need or want something more should also expect to pay more.
Netflix seemed to be operating on that fairly straightforward logic Tuesday, when it said subscribers who want unlimited access both to the DVDs the company mails out as well as the video it streams online will have to pay 60% more per month -- $15.98 rather than $9.99. Customers were perturbed, at least as much as Coke fans who heard the company wanted to cajole a few more coins from them when the sun was high.
But a customer base, whether it's large or small, does not act entirely in unison, and different behaviors usually demand different price points -- particularly when technology and the economy are making it infinitely more difficult for corporations to turn a buck in more traditional fashion. Netflix subscribers who want both streaming video and DVDs are absorbing a simple price hike, but what about people who only want DVDs?
Netflix said it was simply trying to accommodate the various behaviors exhibited by existing subscribers and potential new ones. In addition to the higher price for the DVD-plus -streaming plan, Netflix introduced two DVD-only plans: $7.99 a month to have one DVD out at a time and $11.99 to have two. When it designed the earlier plan that treated DVDs like a $2 add-on to its streaming plan, Netflix explained on its blog, it hadn't anticipated offering DVD-only plans. "Since then we have realized that there is still a very large continuing demand for DVDs both from our existing members as well as non-members," it said. "Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs."
Netflix is trying to serve up "dishes" -- or in this case "viewing occasions" -- appropriate to a variety of customers. That's a harder trick to pull off these days, as video viewers can watch a favorite piece of content in a dizzying number of ways. Maybe you watch TV content "old school," at the time and on the day that a network airs it. Maybe you only watch shows you record for later. Perhaps you only graze video online. You might have even abandoned cable, using Hulu and Netflix to keep up.
The fact is , however, that each of these potential scenarios serves a different level of desire for convenience. How much would you pay for it? Let's say for argument's sake that a TV network like ABC typically waits 24 hours before making some of its best-watched shows, such as "Grey 's Anatomy" or "Modern Family," available for online viewing.
Now say you're a rabid fan of one or both of those programs, but couldn't watch them in prime time because you had to attend a child's school awards function. More bad luck: You forgot to set your DVR. So now you have to wait at least a day to see the show, and even then you might have to watch while sitting in an office chair at your home desk. Wouldn't you be willing to pay a dollar or so to watch the episode earlier if ABC made it available?
Those are the sorts of riddles content providers must try to solve these days. If a media company makes it all the more easy for you to watch what you want when you want, couldn't they expect you to pay a little more for the service? People who want Netflix via both DVD (where there's a better selection) and online (where they can watch instantly) seem to want an all-you-can-eat buffet. Shouldn't they be charged more than people who just want to receive one or two DVDs by mail?
There is no one-size-fits-all customer base any longer. Companies that try to behave as if each of its consumers is the same as the next -- as if everyone has an equal comfort with streaming video, for example -- risk overcharging some people and undercharging others. Perhaps Coca-Cola was being unreasonable when it sought out a "hot-weather premium" for a can of its fizzy brown liquid. But Netflix can make the case that subscribers who want DVDs and online streaming are more voracious consumers of its service, and therefore should pay more.
If you want the all-you-can-eat option, you'll have to shell out more than the guy who orders a bowl of soup. Netflix's behavior isn't creating the cost structure alone. You are too. Stop eating so much, and you can pay less.
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Tuning In is an ongoing series of commentaries by Ad Age TV Editor Brian Steinberg on the TV schedule, the ads it carries and changes within the industry. Follow him on Twitter.