The Price Elasticity of Netflix

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Who Will Remain a Member of Netflix?


The number 1 fear of Netflix’s CEO is that the change from a combination of selling unlimited DVD and unlimited Streaming caused him to believe that the company would not have great success in business as they have had for the past 5 years if they separated the two. By letting his arrogance get in the way, played a big part of the miscommunication that came about when the members of Netflix found out that the programs were going to be separated and possibly have a price increase.

Netflix’s price increase has just previously gone up by 60% after the streaming and dvd rental programs were combined. The number of subscribers in their 3rd quarter was 23.79 million. The company has generated over $822 million dollars in revenue and that is just from one quarter. If you look at their 2nd quarter they had received 24.59 million subscribers. Overall Netflix has lost over 800,000 subscribers because of their price hikes. The cost of unlimited streaming and unlimited dvd rentals is at a set price of $7.99 each. The company concurs that the price at hand still is relatively low compared to their competitors.

The price elasticity demand was lowered not only because there was a separation of the products that the consumer was use to, but also because the pricing going up. In today’s economy people are basically trying to see where every penny is accounted for. There is also a separation with the cable bills. People are now trading there cable box for a product called Hulu.com. It is an internet site where you can watch unlimited television, movies, and recorded shows at your leisure.

Because of the price elasticity of Netflix went 60%, customers were very furious to learn of a new company called Qwikster in the recent chain of events. They did not want to have to pay for two hiked up prices for a product that they were used to using, that now is combined. A lot of times companies will higher there prices to cover the expenses that may be at hand when they choose to expand a service or product. Consumers are really reluctant to dish out more cash. If you think about Netflix, it is not a necessity. No one is going to die without it. So with me being a consumer, I try to hold on to things that are necessary by paying for those items first and if I had a little extra money left over,then I could splurge on something that I want as opposed to something that I need.

On television these days, speaking personally I may see an infomercial at night with this great product and if I have the money on my debit card I purchase it. Then, when Fed Ex delivers it to my door I get all excited, until I open the box and realize that it is not what I expected. The infomercial made it seem so much better. Sometimes if a company wants their product or products to sale, they will advertise to consumers in a way to lure them in. A lot of times companies will you testimonies from people claiming how great the company’s products or services are. In all actuality, the people claiming how wonderful the product or service is, are just basically actors being paid to say so.

As far as the Cross-Price Elasticity for Netflix vs. Redbox is that Netflix earnings were 1.36 billion dollars in 2008, while Redbox only earned 388.5 million dollars in 2008. Both company’s revenue was hire in 2009. Netflix earned 1.67 billion in 2009, while Redbox’s revenue was only 773.5 million that same year.

I believe that both companies are unrelated because as we’ve notice, the companies’ sales have increased in the past five years and although it is relevant and clearly noted that Netflix has brought in more revenue compared to the Redbox, but it is also relevant that we as consumers are seeing Redbox as a growing business. Redbox is going to team up with Verizon. Their revenue will continue to grow and their market will expand.

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