Netflix Pricing

1. Netflix

a) If we ignore the difference amongst subscribers and treat all of them as users of both services, is the price move by Netflix profitable? What percentage of the original customers could Netflix afford to lose?  

Delta P% = ($16 / $10) – 1 = 60%

Incremental break-even analysis: Delta Q% = - (60%) / (20%+60%) = -75%

Break-even customer base: Total 24 million subscriber x (1 – 75%) = 6 million

Netflix could afford 75% loss on customer base, which means 18 million customers, to break even in response to the increase of price. Currently Netflix just loses 0.8 million customers, so it is still profitable.

b) Such a price change will obviously benefit the users of a single service only and charge more to the users of both services. In the worst scenario, the number of single service users will not increase, but the number of both service users will decrease. In this worst scenario, is Netflix’s pricing move profitable? (show you work to get credits)  

Incremental break-even analysis: Delta Q% = -75% (from previous question)

Break-even customer base (for both service users): 12 million * (1 – 75%) = 3 million

As there is no margin on single service users and both service users can afford 9 million losses on customer base, Netflix just loses 0.8 million customers, thus it is still profitable.

c) If you are a diligent investment analyst and you do not know how Netflix’s customers may change and you do not know for sure if you have the right customer contribution margins, what you may do to make your analysis more robust and accurate?  

I will refer to the industry standard for my analysis, e.g. taking the average contribution margins in this industry as an indicator to estimate the break-even point. Also, I can do a sampling survey (conjoint analysis) to understand the elasticity of demand among the Netflix’s customers to project the change after the new pricing policy.

2. Thriftway

a) If the price elasticity and the past relationship between the sales of turkey and the increased sales of other goods are expected to hold, would you recommend such a loss leader promotion? Why or why not?  

($+.540 * 50%) + ($+.692 * 20%) + ($+.114 * 33%) + ($-.250 * 40%) = $0.34602

Regarding turkey, the loss leader sales will generate $0.06 loss per pound, however, if we sum up the margin of all other products with respect to the price change on turkey, it will generate $0.34602 profit (per pound change on Turkey), which is good enough to cover the loss on turkey. Thus, I will recommend the loss leader promotion.