Netflix just raised their prices by a dollar without much noise at all, aside from investors cheering as the stock went up three percent to a new high of over $200 per share. Compare that to 2011, when they raised prices by 60 percent and all hell broke loose. The stock fell 88 percent in four months and the next quarter, Netflix announced they lost 800,000 customers, which was about four percent of their total subscribers at the time.
At face value, it seems obvious why the 2017 price increase was so much better than the 2011. The 2011 price increase was much bigger, more dramatic and a surprise.
Shortly after it, I wrote an article in the Harvard Business Review about I was happy they increased prices, as my thought was it would lead to better content. It was controversial at the time--other people wrote responses about how stupid my article was.
In contrast, the 2017 price increase was smaller, coupled with the announcement of new content. It was also one of several prices increases Netflix has done in recent years. Even still, there are three important lessons we can learn about it that are incredibly valuable to entrepreneurs:
1. If your startup gives more than it takes, don't be scared to take price.
Most people remember Netflix's 2011 price increase as a failure. In truth, it was a great success. To increase your prices by 60 percent but lose only four percent of volume/subscribers is a massive win.
This is key to remember if you are taking prices up for the first time in your startup. There will be noise. There will be controversy. And you will lose some customers. But it can still be the right thing to do, if you have a 'generous brand'.
A generous brand is one that gives more benefits than it takes in price. If your brand is generous, then you have room to increase pricing.
This can be hard to discern, so I suggest you borrow an idea from my friend and pricing expert, Rafi Mohammed. He always asks the question of what is your consumer's next best alternative when it comes to pricing. If you consider that cable television is one of the next best alternatives and cable pricing can be $100 or more per month, it is clear that Netflix has a huge runway to increase pricing.
2. Set the expectation for regular price increases and regular innovation.
The first price increase is always the hardest. So you have to set the expectations that price increases are the norm and predictable at a certain cadence. Being predictable is the key here.
The best way to execute your pricing moves is to do it at the same time as when you launch innovation. The price increase of 2017 is a great example of this, as Netflix increased prices for its high definition plan one dollar and its 4K plan two dollars, while leaving its base plan the same.
3. If you can't raise prices, you have fix the fundamentals or even fold.
For Netflix, they are constantly tinkering with their content to ensure they remain relevant and worthy of their prices. But you'll note, they did not raise the price on their base plan.
For entrepreneurs, you have to constantly look at your flaws and tinker. This is a hard point to make as many entrepreneurs are so heavily invested in their startups it is easy to have blinders on. Sometimes it can be hard to see flaws in your business that others can see.
No matter how much press you have, how much your current customers love you and how much you believe in your startup, the simple truth is the ability to take price is the clearest sign of how healthy your business is.
It's easy to make excuses about the difficulty of raising prices, be it competitors or the category context. But the simple truth is you need to increase prices on occasion to innovate. If you can't innovate, you can't grow.
If this is you, you have to look hard at either figuring out what the fundamental flaws are in your business. And you have to fix them.
And if you can't fix them, it might be time to fold and start over. That is an incredibly hard decision. But it is better to fold then throw good money after bad with a flawed business.