Pricing Lessons We Can Learn From Netflix

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on August 1, 2011 in Finance
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Have you heard about  Netflix’s plan to increase their prices on a segment of customers who were getting the best of two services for a really great price. It’s kind of old news by now, but here’s the background: Right now, Netflix subscribers can get unlimited streaming and unlimited DVDs (one at a time) for $10 per month. Starting September 1, that same plan will cost  $16. Customers are irate at the 60% price increase. We don’t necessarily want irate customers, but we can learn some things from Netflix’s approach.

Netflix isn’t grandfathering customers who are currently on a plan.

Often businesses allow current customers to keep their current service plan at the same price and only require new customers to get the new price. Netflix isn’t giving this option. Customers have to either pay more for their same service or pick another, possibly cheaper option.

Lots of freelancers choose to keep current clients at the same pricing when they increase rates, but it isn’t always a good financial decision. It may not be profitable to keep writing at $.10/word for some clients while your new clients pay you $.15/word. Many clients who like your work will pay the extra price. Some may leave (that could be what you want), but that gives you the opportunity to find clients who’ll pay your rate.

Customers now have to pay for the benefits they’re getting.

A couple years ago, I started having requests for images in addition to content. It didn’t sound like a huge request until I started searching for images that met client specifications. It can take almost as much time to find an image as it does to create content. When image searching – and other extras like social promotion – begins to take a considerable about of time, include it in your pricing.

Because it’s can be bad business to start charging customers for something they used to get for free, try to price things correctly from the beginning. If you have to alter your pricing mid-project, give clients advance notice and options. For example, “Starting September 1, image searches will cost an additional $15. You can continue receiving content at the regular rate of $75/article.” These types of changes may require you to redo your contract if you have one.

Continually review pricing.

It was only about 9 months ago that Netflix introduced the streaming only option and they’ve already realized they’ll make more money by switching up the plans and prices. At least twice a year, review your current pricing and confirm your rates are at the right level. For example, you may increase your rates if you experience a cost of living increase or if you receive a certification that makes you more qualified in your niche.

 

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LaToya Irby is a full-time freelance writer and a graduate of the University of Alabama. She primarily writes about personal finance, freelancing, and other self-employment topics.

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8 Comments

  1. Lori August 2, 2011 Reply

    Wow. You’ve done two things here, LaToya. You’ve shown how to be sensible in your pricing, and you’ve calmed me down over the Netflix debacle. LOL! Never thought anyone could do that!

  2. Corey Freeman August 2, 2011 Reply

    Interesting post. I remember reading something a while back about raising prices. It boiled down to “just do it.” Clinging to low paying clients will only burn you out.

  3. Jennifer Mattern August 2, 2011 Reply

    While it’s true that keeping old clients at lower rates isn’t always a good idea, it’s equally important to remember that sometimes it is.

    For example, my target rate is $150 per hour. I have one client on old rates that are lower per article than any of my others. It’s not simply a case of wanting to keep the client happy (they’d definitely have to go elsewhere if I charged them my current rates). It’s a case of the lower project pricing still being more profitable than work from new clients. Even at their old rates I average $210 per hour for the work I do. In that case raising rates wouldn’t be smart until the hourly rate was impacted (and bringing in less than my target).

    And there’s another lesson from Netflix: Don’t raise prices unless your increased value justifies it.

    In their case it doesn’t. The streaming selection is still quite limited (at least when it comes to things that are worthwhile). They constantly lose licensing for things in my queue. And they already raised prices once within the past year — it’s not an issue of people not being able to afford the new rates so much as their blatant disregard for customers with two rate hikes in the course of a year without adequately improving streaming to justify it. For everyone I’ve talked to who’s happy with streaming changes, I’ve talked to even more who are pissed because they can’t keep the shows they want or have no movies they’d actually want to see or their ties to Silverlight cause constant technical problems. As an add-on it makes sense when you have a DVD to fill in their content gaps. Forcing stand-alone pricing does not for many. If they wanted standalone streaming service, they would have already switched to it. Obviously the value was in the combo. And the same holds true in freelancing. If you’re going to raise prices (especially in rapid succession) you damn well better be able to justify it.

    As for Netflix, they’re losing me as a customer. I was happy to switch to Amazon Prime w/ their increased selection this month (plus free shipping when I want “real” content delivered). In the end you have to weigh the costs and benefits of losing the customers you piss off. With their recent push of Facebook integration, I’m surprised Netflix didn’t seem to account for the social spread of the pricing uproar. Idiotic timing on their part.

    • Author
      LaToya August 2, 2011 Reply

      I had a section on “Do the math” but I took it out. I read that Netflix while was projected to lose about 2.5 million customers, they were still estimating increased revenue. It definitely makes sense to think through the pricing increase. Netflix can probably afford to piss off a bunch of customers (I read the CEO wants to eventually move to streaming only anyway), but not every freelancer can afford to lose a large portion of their clients.

      I think Netflix’s mistake was failing to price the unlimited streaming + 1 DVD option correctly from the beginning. To me, $15.99 doesn’t sound like a bad price for that particular plan.

      I went through something similar with Blockbuster Online a few years ago. They had a deal where you could get DVDs through the mail, then take the mailers to the store and exchange them for more rentals. I was getting 12-16 DVDs per month for like $12.99! It was a steal. A few months later they jacked up the plan to $27.99 because they were losing money on customers like me.

      I’m keeping Netflix for now. As long as they keep streaming Dora the Explorer, Super Why, and Blue’s Clues they’re good in my book.

      • Jennifer Mattern August 2, 2011 Reply

        I suspect Netflix is underestimating things re: their ability to handle pissing off customers. I doubt their numbers will immediately drop (I got screwed into an extra month because they renewed me right after the email announcement and if you cancel they cut off your access immediately while keeping the full month’s payment). People needed time to think it over. And even those who aren’t really pissed are going to be exposed to better and better options, as we’re already seeing. The better the choices get, the more Netflix will lose. Many won’t jump ship until they feel something is comparable. But once they find that, they’re not likely to forget about Netflix’s lousy customer treatment.

        They couldn’t have priced it that way from the beginning. It was poor quality flash at the time, and the selection was ridiculously limited. Now they force Silverlight which causes a lot of other problems for some customers (was a nightmare for me for months). Either way, they would have had to split them up then — not combine them. You couldn’t justify paying more for the DVDs over a glitchy, shallow streaming service. What they should have done is skip the last price increase or done this sooner in lieu of that. It’s the double whammy that’s going to sink them in many customers’ books. Not the price.

        I remember the Blockbuster deal. Left Netflix the first time for that. Not only did they charge more, but they changed their in-store policy. You used to return your mailers in-store and get another DVD. They would immediately mail you next online selection. The in-store movies were to tide you over while you waited. Then they changed it and if you got a movie in-store by exchanging your mailer they wouldn’t mail your next DVD from the Web until the in-store one was returned. It largely defeated the purpose of the one benefit they really had over Netflix. Couple that screw-up with their failure to get into online video quickly enough and it’s not surprising the ship sank. I have to admit I miss them (a little bit). I liked having local stores around. If nothing else, I made out like a bandit when the stores near me closed. ;)

  4. Jodi Kaplan August 2, 2011 Reply

    Amen Jennifer. If you’re going to charge me more – add more value, not less. Bundled options should be cheaper, not more costly. And their streaming selection is terrible.

    Thanks for the tip on Amazon Prime. I’m going to check it out.

    • Jennifer Mattern August 2, 2011 Reply

      Prime doesn’t offer quite as much with their “free” streaming, but they had plenty of the things I used to use Netflix for. Plus it’s easy to rent new releases there when I want to, so no need for the dvd option as a backup (I was really impressed with the stream quality of their rentals). Amazon also seems to be actively trying to compete now with the addition of new material, and last I heard they were in negotiations with other studios to add even more. Great time for them to compete more aggressively!

  5. Casey Strouse August 3, 2011 Reply

    Thanks for the good article. I think the best piece of advice in it is to continually review pricing. As our skills progress it’s only appropriate to adjust our pricing to reflect the increase in skill level and quality.

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