The Case for Higher Prices

By way of Business Pundit ... I read a blog entry from Mitch, of the The Windows Manager blog, concerning Netflix and their plans to raise prices.

According to the letter Netflix sent Mitch alerting him of their plans, Netflix hasn’t raised prices in nearly four years. Netflix justifies their 10% price increase by stating they have added more than 20 distribution centers and expanded by their inventory.

Raising prices is difficult, but it is necessary and it is better to steadily raise prices regularly than waiting years to raise prices. Its easier for customers to take slight, incremental price increases year-over-year rather than get hit by one large price increase after years of paying the same price.

Back in May 2000, Norm Brodsky, entrepreneur and columnist for Inc. Magazine, wrote a great piece on The Case for Higher Prices.

"Faced with such resistance, a lot of businesspeople are tempted to forgo price increases altogether, or at least put them off for as long as possible. If you do either one, however, you're making a big mistake. Granted, you may not feel the pain for a while. If your sales are going up, you'll probably be able to take home the same amount of money from one year to the next. As a result, you may not see the risks you're taking. In the short term, you'll think you're doing fine.

But, in fact, two things will be happening. First, your profit margins will be shrinking. Why? Because your costs will be going up. Even in Greenspan's America, certain costs always rise. It's what I call "creeping expenses." Some types of expenses have a life of their own. If you don't watch them like a hawk, they go up all by themselves. They may even go up if you do keep an eye on them.

In most small businesses, for example, you can count on payroll increases every year. You can expect regular hikes in insurance rates as well, and I'm not talking just about health insurance. The costs of utilities and supplies also have a tendency to rise over time. OK, some things are cheaper these days -- basic phone service, for example -- and computers let people work more efficiently than before. Nevertheless, your average costs per dollar of sales are going to rise from year to year. They may rise only 2% annually, but compound the increases over 5 or 10 years and eventually you won't be earning a profit anymore -- unless, of course, you raise prices."

For the entire arcticle, click here.

Comments

[Mark Ramsey]

Maybe, but the same day I got that email notice I downgraded to the two DVD's at a time option.

Now I'm SAVING money.

[Director Mitch]

I am in agreement with you - a company has to increase prices - but I think this particular business model is pretty new and Netflix has some large competitors (Walmart, Blockbuster) aiming at them.

I thought a "pre-pay for a year" model was a way to offer those who want the lower price to keep it by paying in advance (and give cash up-front to the company) and those who didn't get the monthly price increase. This will help with brand loyalty which I think is pretty important at this point of an very new business model.

I, like Mark, plan to drop from a "5 at a time" to a 3 in a month or two, so this will mean less total revenue from me as a customer with this new price increase.

[johnmoore (from Brand Autopsy)]

I agree that with the encroaching competition, Netflix might benefit by offering their most frequent customers a guaranteed “old price” rate for 12 months. That would help buffer Netflix from losing customers who might be tempted to switch to one of these upstarts.

An even more interesting move would be for Netflix to allow customers to prepay upfront for 12 months and reward those customers that do the yearly prepay plan with an extra month of rentals free. I’m not sure how many of their frequent users would go for it, but it would be an even more defensively aggressive move to stave off switchers.