Deciphering Netflix Pricing Strategy

If you’ve found Netflix’s pricing pyramid a bit tough to unravel, you’re not alone. The cost of renting 3 DVDs is $17/month, whereas 6 DVDs is $36 (16.99 and 35.99, to be precise, but we don’t count pennies here). Similarly, 4 DVDs is $24/month, 8 is $48. By traditional economies of scale, this may not make much sense: Getting 6 DVDs costs MORE than getting two 3 DVD subscriptions. And getting 8 DVDs isn’t any cheaper than getting two 4 DVD plans.

But let’s break this down a bit differently. Netflix plans start at $9 for 1 DVD and increase with each additional DVD like this:

2nd 3rd 4th 5th 6th 7th 8th
+5 +3 +7 +6 +6 +6 +6

The 3 DVD plan is an outlier here, which can be explained by Netflix’s competition with Blockbuster. In order to be competitive, Netflix aims to keep the 3 DVD plan (its signature plan) as low as possible in order to lure customers in. (Blockbuster charges $16 for 3.) Once customers are hooked on a Netflix plan-any lower plan-they’re going to realize how slack they are to return movies and lazily decide to upgrade. That 4th CD is going to cost them, and so will the 5th, 6th, etc.

As far as we know, this doesn’t have anything to do with Netflix’s practice of penalizing heavy users with slower service. If you’re a heavy Netflix user and are concerned about getting punished for it, check out GeekTonic’s work-around.

(Thanks to Alex Lunney!)
[Photo: bebop17]

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