We offer a wide range of plans to suit your movie watching needs. We encourage you to try out different plans and find the one that fits you best!So the marginal/average costs as movies are added look like...
1st movie: $9/$9 (okay... $8.99)
2nd movie: $5/$7
3rd movie: $3/$5.67
4th movie: $7/$6
5th movie: $6/$6
6th movie: $6/$6
7th movie: $6/$6
8th movie: $6/$6
Of course, we expect a decline in per-movie price with more movies accounts as the fixed costs are amortized over a larger purchase, but we only see that up to three movies. At four movies, the average cost goes up and is constant for five and more. Furthermore, are there even really any materially significant fixed costs for adding a new user? The fact that a customer can run multiple profiles with separate queues at no additional cost (I do this for my kids), suggests that much of what I would think of as fixed costs are really negligible.
So assuming negligible fixed cost, Netflix is choosing this pricing scheme to drive customer behavior toward a three-movie/month optimum (notwithstanding frequent e-mail overtures to go to four/month). Why?
4 comments:
I'm no economist...but how does price competition play into this? I think they may have depressed the 3/mo price in order to hold off Wal-mart and Blockbuster (or because everyone compares the 3/mo price) but $6/movie-month is their actual desired price point,
"Of course, we expect a decline in per-movie price with more movies accounts as the fixed costs are amortized over a larger purchase"
This makes the assumption that the fixed costs are a significant factor in the pricing scheme. From my admittedly limited understanding of Netflix's business model, the fixed costs associated with each account are:
A) Storage space for account info
B) Storage space for ratings info
C) Bandwidth
(A) is almost negligible, given that a Gigabyte of HDD storage is about $0.50 (for consumers - economies of scale may reduce that dramatically.
(B) is still almost negligible, and is probably dominated by the positive effect of having additional ratings information
(C) was almost negligible before the streaming movies. Even with the dramatic increase in total bandwidth consumption, I don't expect that one individual with multiple accounts streams more movies than he/she would with only a single account - thus the difference between the one account and multi-account scenarios is negligible.
I expect that Netflix's per-unit costs are by far the major factor in their pricing. The marginal cost of the discs will be determined by their mean lifetime - 100 rentals of a $20 disc = $0.20 per disc. The mailing costs probably make up most of the remainder - maybe $0.60 per mailing?
Based on my renting history statistics as a Netflix subscriber over the past 5 years, the average marginal cost per disc received is about $1 for the 4+ plans, or $0.95 for the 3 plan. That leaves about $0.15 of net profit per disc - which is (I believe) a pretty thin margin. I'm pretty fast with my rental turnaround, so most "normal" subscribers are probably much more profitable.
It still does rankle a bit that the higher quantity plans actually cost about $0.30 more per movie-month, but that's only $3.60 a year. For that added cost, I have the benefit of having all of my renting history in a single location. I don't have to login and logout to adjust the different queues, and all of my rating information is consolidated, resulting in (theoretically) better recommendations. There's also the fact that getting multiple accounts only allows for multiples of 3 movies at a time (if you're shooting for value maximization).
I suspect that there is a reason why all the movie rental services offer a 3-at-time plan as the "standard." I like to believe (without proof) that it is based on the average number of movies a typical household watches in a week, or that it's just in the optimal price range for an entertainment service.
Rich also has a very good point. When I first started with Netflix, the 3-at-time plan was $17.99 - which matches the higher level offerings price/movie-month. As I recall, it was dropped to match Blockbuster's price point.
"I like to believe (without proof) that it is based on the average number of movies a typical household watches in a week.."
I run a site called FeedFlix and based on data so far here's what the most popular plans look like. It's not solid proof since the sample size is tiny compared to the total NF userbase but more than a 3rd of all members are on the 3/time plan.
There are other interesting patterns we are uncovering at FeedFlix. I invite you to check it out.
They may feel that consumers can be grouped into low and high demand consumers. They want to encourage the low demand consumers to get 3 dvds and the high demand consumers are willing to pay more to have a large number of DVDs on hand.
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