Netflix said today that it "hates" upsetting customers by raising prices as much as 60 percent and acknowledged that the customer backlash to the rate hike would likely stifle growth and hurt earnings in the short term.
But in the long run, Netflix expects the price hike to yield some important benefits and may help the company hit a key benchmark: generate $1 billion in revenue during a single quarter. No doubt, many Netflix subscribers won't be impressed with that figure since some of that money will be coming out of their pockets. For people who hoped Netflix would reverse its decision on the price increase, the company's remarks suggest that isn't going to happen.
"Some subscribers will cancel Netflix or downgrade their Netflix plans," the company said in a note to investors after it issued its second-quarter earnings report. "We expect most to stay with us because each of our $7.99 plans is an incredible value. We hate making our subscribers upset with us, but we feel like we provide a fantastic service and we're working hard to further improve the quality and range of our streaming content in (the fourth quarter) and beyond.
Netflix acknowledged that by announcing the price boost months in advance, the company will lose customers in the current quarter but won't see any of the financial benefits from the increase until the fourth. So while financial performance will be pressured in this quarter, which ends September 30, the company expects the new pricing strategy to pay off in the fourth quarter.
"Revenue will reflect a full quarter's impact of the pricing changes, which could result in (the fourth quarter) being our first billion dollar global revenue quarter," the company said.
On July 12, Netflix said it would do away with a popular hybrid subscription plan and that prompted thousands of furious Netflix customers to criticize the company via Twitter and Facebook posts. Under the terms of that plan, which cost $10, a customer could rent one video at a time and receive unlimited access to the company's streaming library. Come September, subscribers will have to pay for streaming and DVDs separately. They each will cost $7.99 and that means to access both will cost $15.98 per month.
In a phone call with analysts this evening, Netflix CEO Reed Hastings said that prior to announcing the price hike, the company had expected to see more customer backlash.
"Believe it or not, the noise level was less than we expected given a 60 percent increase for some (subscribers)," Hastings said.
There were reports that angry customers swamped Netflix's phone center in the days after the announcement, but Hastings said that the period when customer service representatives were overwhelmed by callers was brief. The company did acknowledge that the price-increase announcement has had a "small effect" on company's churn rate. This likely means that fewer people were signing up to the service or greater numbers of customers were cancelling or perhaps both.
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Churn rates are typically used to measure how many people are moving into or out of a subscription service during a specific period and this in turn helps determine customer satisfaction or the lack of it. Netflix managers did not offer any specifics about how many subscribers have cancelled in the wake of the price-increase announcement.
Notes: 6:26 p.m. PT Hastings also said during the call with analysts that Netflix sees higher churn rates from customers who sign up for streaming-only subscriptions than those that sign up for DVD-only. The reason for that is there's less of a commitment associated with watch video over the Internet than there is when DVDs are being mailed to your home and a disc is sitting on your coffee table...Hastings complimented HBO on its "very impressive" streaming application, HBO Go. The CEO downplayed the competition between HBO Go and Netflix, saying they might compete for "some of the same dollars and time" but are very different offerings.