Netflix Pricing Spineometer: 2 of 5 Vertebrae

Netflix, a video-on-demand subscription service, had a highly positive Q2 2024. Revenue rose 17 % to $9.6 billion and earnings before interest and taxes rose 42% to $2.6 billion over the same period last year.

A review of Netflix’s 18 July 2024 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

Specific comments by the executive team indicate a high level of awareness of the importance of pricing at Netflix.

• Spencer Neumann, CFO, said “We’re also continuing to get better and better at translating improvements in our service into business value, including getting better and better at converting unpaid accounts. And at least on the paid member front, we’re also probably benefiting from that attractive entry point in terms of price point and feature set for our ads plan.”
• Gregory Peters, Co-CEO, “We think about pricing for ads tier very similarly to how we would think about pricing for our non-ads tier. First of all, I just think it’s worth noting that we love having an entry price.”

Other business factors indicate the immense diversity of pricing challenges to be addressed at Netflix.

1. Netflix is in a high-growth industry which increases the need for pricing diligence to avoid squandering value or mishaps in pricing.
2. Netflix operates in a highly fragmented and competitive market. Google’s YouTube captured slightly more hours of screen time than Netflix.  Amazon, Hulu, Disney, Tubi, and Max trail far behind in viewership.
3. Netflix operates globally and large country-specific inflation can have a measurable impact on financial performance. Their letter to shareholders identified Argentine currency fluctuations as impacting growth stating, “Similar to recent quarters, the primary difference between F/X neutral and reported growth large peso price increases in Argentina due to local inflation and the devaluation of the Argentine peso relative to the US dollar”
4. Netflix is driving forward in three major offerings today: video, gaming, and live events.  Each brings its own pricing and costing complexity.
5. Netflix delivers content in with a pricing structure akin to Good-Better-Best Versioning. In any versioning structure, market expansion of the lower-end offerings comes with the expense of cannibalization of the higher-end offerings. Balancing cannibalization and market expansion presents a unique pricing challenge.
6. Netflix has recently added an advertising line of business in which Netflix operates a two-sided market of advertisers and ad-supported subscribers. Beyond the complexity of operating a two-sided market and pricing to subscribers, pricing ads to major branding companies rely on negotiated prices where pricing analytics has proven useful in other industries for guiding salespeople’s price negotiations.
7. And, like many other businesses, Netflix is now fully adopting the AI terminology in its efforts at automating improvement in user experience. Gregory Peters, Co-CEO at Netflix, said “We’ve been using similar technologies, AI and ML, for many years to improve the discovery experience and drive more engagement through those improvements.”

Industry benchmarks suggest Netflix should have 65 to 330 pricing professionals stationed around the globe.  Due to the complexity of their business and the rapid changes in their business, we would expect Netflix to be in the upper half of this range.

Research into the investment by Netflix in pricing yielded extremely underwhelming results.

1. Most professionals at Netflix who identified pricing as a skill worked in transfer pricing, not customer pricing. While transfer pricing is a great tax management strategy, it is a completely different challenge than trying to capture money from actual customers and therefore does not count against industry benchmarks.
2. Although an analytics engineer, manager, and director identified pricing as their core responsibility, the industry benchmarks suggested far more than three people to be focused on pricing challenges.
3. When looking at the teams at Netflix for possible employment, neither pricing nor revenue management were identified as teams in which to work. This leads to the belief that pricing is not a recognized discipline within Netflix.
4. Other people working on pricing issues typically listed project management as their core responsibility. Product and price management are complementary roles and should not be treated as substitutes for each other.

Given the importance and capability of pricing at Netflix as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of July 2024.

Netflix Pricing Spineometer: 2 out of 5 Vertebrae. Some solid pricing decisions are being made but we suspect there is a large opportunity for improvement with professional and technical diligence.

NFLX (Netflix Inc.) fell from 656 the day prior to their earnings call to 635 one day after. FY 2023 revenue of $33.7  billion with a 21% operating margin and P/E ratio hovering around 40.

For FY 2023, a 1% improvement in price would yield a 5% improvement in operating profits holding all else constant at Netflix.