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Netflix pricing
It looks kind of screwy; 3 movies at a time is $16.99 a month but 8 movies at a time is $47.99 a month. After three movies, the average cost of a rental (see the link for the numbers) is either flat or rising. Why go for the 8 movies deal instead of setting up separate accounts and queues, thereby saving money? Why is Netflix encouraging everyone to do the 3 movies a month version of the plan? Why are there no quantity discounts past the 3 movies a month margin? (And, by the way, aren't there still lower prices for newbies, at least for a while?)
I suspect this is one of those pricing models that traps a small number of overenthusiastic patrons into paying more, keep a few others away from overgorging on old Jackie Chan films and then quitting prematurely, and de facto gives most customers a pretty flat pricing structure. Transparency is sacrificed but does anyone really care?
The pointer is from Angus Hedrick.
Posted by Tyler Cowen on April 17, 2008 at 01:06 PM in Film | Permalink
Comments
postage is netflix' primary cost. most of the 3-at-a-time customers are just letting the disks sit around unwatched for long period, lowering cost. the people signing up for the 8-at-a-time plan are more likely to watch or at least sample their disks aggressively and thus have a higher mailing rate.
Posted by: DK at Apr 17, 2008 1:21:55 PM
8 movies at a time is probably designed to catch people who borrow in bulk,
like multiple seasons of hbo shows.
Posted by: fv at Apr 17, 2008 1:28:07 PM
8 out at a time is different than two accounts with 4 out at a time, and it actually better in most situations. If you just have a bunch of old movies you want to watch at some point, it doesn't matter. But if you have multiple time dependencies between discs you want the 8 out rather than two 4 outs. For example, you might want to watch two anime series both with about 6 discs, interspersed, then after they are both done watch a specific movie. You can make this happen with the two queues, but it involves potentially modifying a queue after every movie return because of uncertainty about which discs you will watch and return first.
Posted by: Nathan Whitehead at Apr 17, 2008 1:30:23 PM
What Whitehead said: The service Netflix is pricing is not movies but queue management. After all, you can rent movies practically anywhere.
Posted by: Grant Gould at Apr 17, 2008 1:41:11 PM
DK's comments make sense. I think anyone who needs more than three movies out at one time is either retired, unemployed, housebound, or in prison. These would be expensive clients to service.
Posted by: SheetWise at Apr 17, 2008 2:01:43 PM
...handbrake+external usb FTW.
Posted by: shawn at Apr 17, 2008 2:06:44 PM
The consumer being able to rent 8 movies at a time is very expensive for NEt Flix to have upkeep on. They are paying postage to send out all of these movies, and if the person watches them and is able to return them in less than a week's time is really cutting into the bottom line. Offering the plan for much more money over the 3 per time is a fair price to really stick it to the people who are overexcessive about watching movies. It's apparent that NFLX is the top offerer of movies online with how their stock price has grown over the last 3.5 months. Them not doing brick and morter is the best thing that could happen for them. NFLX saw the times changing with high speed internet and said to themselves, "Lets offer movies through teh mail and over high speed internet connections so we don't have to build drop off points for movies. Pur genious in my book!
Posted by: Will Ricks at Apr 17, 2008 2:14:45 PM
To the larger point, companies don't always offer price discounts for larger purchases. We may assume that the larger size of peanut butter or laundry detergent is a better deal, but sometimes it's not. Sellers have begun taking advantage of that assumption, sometimes marking up the larger sizes to a higher cost per unit. Unwitting customers who haven't done the math may think they're getting a deal when they would have done better buying two smaller containers. I wonder if netflix is just doing the same thing, hoping to increase its margins on customers who have been conditioned to buy in bulk.
Posted by: cw at Apr 17, 2008 2:17:29 PM
Those of you who are pointing out that 8 is better are missing the point. The marginal cost for the 3 out system is lower than that for the 8 out system. Theoretically you could do 9 out for a lower marginal cost than the 8 out by setting up 3 accounts.
Perhaps this is a good question for the people who worked on Nudge.
Posted by: Christopher at Apr 17, 2008 2:22:08 PM
It's also worth mentioning that two accounts can't be linked to the same postal or e-mail address.
Or funding source, I do believe.
Posted by: Jeff at Apr 17, 2008 2:42:08 PM
Everyone needs to check their math. 3*17>48. 4*14>48. $17+30<48 but just barely. I haven't worked through all the combinations and permuations but the Netflix plan isn't screwy at all and offers no obvious way to game it.
Posted by: Alex Tabarrok at Apr 17, 2008 2:56:56 PM
Actually, the 3 movies at a time used to fall more in line with the other plans, but Netflix dropped the price on it in order to compete with Blockbusters service, which had the same price but also offered in store trade-ins. As for why they only dropped the price on the 3 movie service, I'd guess that it's far and away the most popular choice and the only one that really made sense to compete so heavily with Blockbuster on.
Posted by: Matt at Apr 17, 2008 3:02:40 PM
As someone who was thinking about signing up for 4-plan and was put off by the marginal cost, I wonder as well.
It generally takes 3 to 4 days to receive a new DVD. If you return a movie the day after you receive it, you can watch 3 or 4 per week on the 3-plan. Bumping up to a fourth movie allows one to potentially watch 6 movies a week. You go from about 16 per month to about 24, a jump of 50%. Another way to consider it is that it costs $17/mo to watch about 16 movies, at $24 you can watch 24 movies (and probably more).
Second is inventory. I notice that the first disc of a TV series sometimes has a short wait. Either through frequent rental or people who hold discs a long time, Netflix would have to increase it's inventory to keep wait times low.
Posted by: 8 at Apr 17, 2008 3:07:08 PM
It's more like Blockbuster is compeiting with Netflix. That is very apparent with Blcokbuster trying to merger with a struggling company like Circuit City. A pointless merger to me because they are paying for a company that is already dead. I don't see how Blockbuster could turn Circuit City into anything profitable. They need to not talk about mergering with Circuit City and start closing down brick and morter stores and move more into the internet way of ordering movies. Brick and morter is not the way to go for video rental places, unless they are privately owned and the only rental place in a small town.
Posted by: Will Ricks at Apr 17, 2008 3:09:07 PM
My friends and I also wondered why there weren't bulk discounts. We posited that it may be to stop us from doing exactly what we wanted to do -- buy in bulk on one account and then split the movies.
Posted by: at Apr 17, 2008 3:30:32 PM
I run a site that caters to Netflix members called FeedFlix.
While we only have a very tiny slice of the entire NF user base, we are able to get to some interesting patterns. For example, here is the relative popularity of Netflix plans. Over a third are on the 3/time plan and fully 83%(!) are at that level or *less*. After that, the fall off is pretty rapid.
There are other such aggregate patterns over on the site. I invite you all to check it out.
Posted by: Raghu Srinivasan at Apr 17, 2008 4:07:37 PM
Why are there no quantity discounts past the 3 movies a month margin?
...
My friends and I also wondered why there weren't bulk discounts.
Maybe because Netflix doesn't WANT you to buy in bulk. Read this:
But it doesn’t actually work that way. Using a technique called “throttling,” Netflix identifies customers who abuse the all-you-can-rent DVD service by viewing and returning movies too frequently. The nerve! Using an algorithm that notifies the company when a customer is going to start costing it money, it “throttles” them back by delaying the shipment of their next movie—and thereby ensuring its profit. Customers who rent infrequently—otherwise known as profitable customers—are also given preference for DVDs that are out of stock due to high demand. Frequent renters just have to wait.
People that sign up to get 8 movies at once (at once!) probably are most likely to be the same people that watch and return moves extremely quickly, cutting into Netflix profits. They are probably most likely to be like one of my co-workers, who gets movies from Netflix, rips them to his computer and then immediately mails them back, so he can watch them later.
Posted by: Bob Montgomery at Apr 17, 2008 4:18:37 PM
After much weeping and gnashing of teeth, we upped our plan to the four at a time plan when we disconnected our satellite tv.
My guess is that the average 3-at-a-time subscriber is a casual movie watcher who also watches a fair amount of tv. Once someone is willing to make the price jump to 4-at-a-time, you've got people who really want to cycle a lot of movies - which is what we do. Since we don't have tv, we are taking out enough movies to satisfy four viewers with a variety of interests. We go through a LOT of movies each month. Lots more than when we did the 3-at-a-time plan and had tv.
Posted by: Amy at Apr 17, 2008 4:36:23 PM
Those of you who are pointing out that 8 is better are missing the point. The marginal cost for the 3 out system is lower than that for the 8 out system. Theoretically you could do 9 out for a lower marginal cost than the 8 out by setting up 3 accounts.
Multiple queues may offer another solution to the problem of series; if you want a six disc series, and you're very strict about getting them in order, then you really want your queue order observed. Disc 4 or season 3 may be pointless without disc 3 or season 2. However, others standalone discs you may be willing to skip further down your queue in order to get faster. Unless Netflix has more fine-grained queue management than it used to, multiple queues might be useful for the consumer; put a series on one queue while putting standalone requests on another.
Posted by: John Thacker at Apr 17, 2008 5:50:24 PM
cw is quite correct. I have frequently seen groceries in particular priced so that
the smaller size is the better buy. Sometimes I suspect this is done because they got a
special buy on the smaller item, or because they need to move them.
Posted by: mikesdak at Apr 17, 2008 7:06:51 PM
Nobody has made this point yet:
The more expensive "bulk price" might be a cheaper way to deal with these re-renters (in the long run) than a lawsuit.
The most galling thing for Reed Hastings, though, wouldn't be the re-renting per se, but that the re-renters would charge late fees!
Posted by: 72 km/h at Apr 17, 2008 7:49:50 PM
I have Blockbuster with the 3 movies deal.
I an neither retired, unemployed, housebound, nor in prison, and 3 movies is never enough. I even watch the commentary and all special features.
This is due to the fact that I rarely watch television except for movies.
I always think of business policy in one of two ways. Either (1) they are doing what they are doing strategically to expand their customer captivity or (2) they are completely clueless and about to drive customers away.
I've even considered having a 3fer from Netflix AND Blockbuster because they fill slightly different niches (Netflix for the depth and Blockbuster for convenience). I seriously doubt that is what Netflix management has in mind.
Posted by: Andrew at Apr 17, 2008 8:08:46 PM
Or, maybe it is. Perhaps they are subsidizing the cost of the 3fer to get their foot in your door. I can attest that once you go by mail, you don't go back. Not having to go to the video store saved my marriage!
Posted by: Andrew at Apr 17, 2008 8:10:45 PM
I think it's probably a classic case of price discrimination. Customers sensitive to price are on the 1 and 2 disk plans; customers who aren't get 3. Sure, you could offer a 4th for $4 or something instead, but the $1-2/head profit you gain from increased popularity isn't worth the ~$4/head/extra disk loss on the non-price conscious extreme cinemaphines. Remember, they don't _need_ many 8 disk customers ... they're already making a killing on them. It'd take a lot of demand for 4th disks to make up for it.
Posted by: Tim at Apr 17, 2008 8:24:43 PM
I think Bob Montgomery made an important point in all of this. We used to have a high-disc plan (can't remember, I think 5 at a time) and it wasn't worth it. You weren't able to watch 66% more movies per month with that plan, compared to the 3-at-a-time plan, because they didn't turn them around as quickly. At first I thought I was just being paranoid and cynical until I saw those news stories such as the one Montgomery linked to.
Posted by: Bob Murphy at Apr 17, 2008 11:37:10 PM
If it's true, that they manage consumption because their costs are correlated to churn, then why don't they just charge on a per movie basis? That would be easy to do since everything is already computerized by the fact that they use the web interface movie queue.
Would people give them more money per movie if each movie cost them $1 or so or do they give them more money now for the right for an extra movie a week costs them $4/month?
I think it must be a market share strategy, with a little bit of cost management thrown in. There is a limit to the number of movies a person can watch, but at this point, the market for new customers is essentially unlimited. And, as customers move up the economic ladder, unlike some other products, they will use less of this service (until they have kids of movie watching age). Once they get everyone on the 3fer plan, they can raise prices.
They are discouraging the higher volume plans. I think it must be intentionally. There is no economy of scale for them. Managing the number of movies has got to be a hassle and having different customer classes is a management job. I think they should move to charging per movie shipped. And they should vary the cost of the movie based on available inventory.
But I will say this. I'm finally excited to check the mail. The Post Office finally has meaning to me. Why are they raising prices...AGAIN!
Posted by: Andrew at Apr 18, 2008 6:23:44 AM
Perhaps behavioral economics can provide some insight. The "8 for $47.99 per month" plan may simply serve as an anchor that will get you to buy the "3 for $16.99 per month" plan because it looks cheap by comparison (a clever marketing trick). It's like the example that Dan Ariely put forth in his book Predictably Irrational where The Economist offered "print only" and "print plus online service" for the exact same price. Who would buy the "print only" service when they could have the "print plus online" for not one cent more? No one - but it likely caused more people to buy subscriptions than would have otherwise. I'm not discounting any of the previously mentioned theories, I'm just offering up another explanation.
Posted by: Matt at Apr 18, 2008 10:33:15 AM
Maybe they don't want people to go on a lending-spree ?
Maybe they are afraid of seeing their stock dig and not being able to meet the demand ?
By the way, the true question is : who still pay for old movies at the age of Mininova ?
Posted by: Jeremy at Apr 18, 2008 4:24:40 PM
I have had the 8 disc plan for a couple of years. Understanding the per disc cost involved, I can certainly understand why it would be more economical to setup three separate accounts. However, information Netflix provides through their recommendation engine has value that should be considered. I have rated close to 2000 movies and have found the recommendations to be quite valuable. The time required to replicate my recommendations across three accounts is more valuable than the incremental cost of have the 8-disc plan vs 3 3-disc plans.
Posted by: ard at Apr 19, 2008 5:56:03 AM
Has anyone else noticed that the quality of their recommendations nosedived about a month ago? Or am i just getting pickier?
Posted by: wired at Apr 19, 2008 10:40:27 AM
Blockbuster is better anyway. They have email customer support in addition to phone. With Netflix you can only phone them, which seems foolish being that they are a Web company.
Posted by: mediahound at May 1, 2008 12:09:51 PM
