Here's the Psychology Behind the Way Netflix Raises Prices

Just this month, Netflix announced that starting in November standard plan subscribers and premium plan subscribers would be seeing a raise in prices.

The standard plan would jump from $9.99 a month to $10.99 a month, while the premium plan would see a $2.00 increase, going from $11.99 to $13.99. The price raise isn’t something that happens too often, and it turns out that there’s a psychology behind it.

“Any time a service increases its price, that change causes consumers to re-assess their perceived value of the service,” Brett Sappington, senior director of research at the firm Parks Associates, told Quartz. “While most will continue as subscribers, some will consider other options or discontinue their subscription. The key for Netflix is to not cause consumers to enter the evaluation or shopping cycle too often.”

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It is true that in the past Netflix has seen a significant drop in subscribers and a plummeting stock price, most notably back in 2010 when Reed Hastings, the chief executive of Netflix, announced that the company would be getting rid of its $10-per-month video and streaming package, instead opting for two separate plans. While the increase in prices in 2010 drove subscribers away, recent price increases haven’t had the same affect.

It turns out that the key to Netflix’s success and its retention of subscribers is due to a combination of different things. Raising prices in small amounts and not very frequently keeps subscribers from entering what Sappington calls the “evaluation and shopping cycle.” But Netflix also adds more value to their service by offering original series subscribers won’t be able to get on other streaming services such as Hulu or Amazon Prime Video.

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“Price is all relative to value,” said Hastings. “We’re continuing to increase the content offering, and we’re seeing that reflected in viewing around the world. So, we try to maintain that feeling that consumers have that we’re a great value in terms of the amount of content we have relative to the prices.”

While more price hikes are expected in the future to help cover the costs of content creation, subscribers seem more than willing to pay for the value of it.