Covid-19 lockdowns drive customers to pay more than ever for Netflix | Media Analysis | Business
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The recent surge in subscription video-on-demand has been one of the consequences of theCovid-19 lockdowns in many countries and research from Simon-Kucher & Partners has found that Netflix's increased popularity has given it room to raise its prices and still rely on strong sales volumes.
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The global strategy and marketing consultancy conducts three times a year a survey among MBA students at the London Business School regarding their likelihood to buy Netflix or alternative streaming services under various price/value scenarios. It surveyed 76 MBA students from six regions, namely Europe, Asia, North and South America, Middle East, and Australia and New Zealand. The study has been conducted nine times since 2017.

The study measured price elasticity, the mathematical expression of how a product’s sales volume will change and has always to date found that there was a clear inverse correlation between pricing and demand.

Yet looking at the current times of the new normal, Simon-Kucher & Partners found that Netflix’s pricing power has increased dramatically. It noted that whereas in the past, a 10% price hike would have resulted in a 6% decline in demand, its latest survey showed that the same 10% price increase now would only drive away 1.3% of customers.

The survey participants showed that they had very quickly adjusted their perceptions of price and value for streaming services as the environment changed. When asked to rank the most important criteria for choosing between different streaming services, breadth of content available and access to latest releases were the first and second most important criteria, whereas price was only fourth in importance.

With social distancing rules and restrictions on public life imposed due to the coronavirus pandemic, the analyst said that it was perhaps no surprise that customers value streaming services like Netflix now more than ever. And this value was translating into a higher willingness to pay for the service. Yet the analyst added that it remained to be seen whether this is a permanent change in value perception, or just a short term effect during lockdown conditions.

“The results indicate that price elasticity for streaming services is at an all-time low,” noted Mark Billige, CEO of Simon-Kucher & Partners. “For the past three years, the calculated price elasticity for a Netflix subscription was approximately -0.6. But in our June study, we saw elasticity collapse to just -0.13. That means that for the same theoretical price increase, volumes would now only fall by about a 1/5th of what we would have expected in the past. Consumers are currently having a crash course in what they can (or can’t) live without. And streaming services are definitely in the ‘can’t live without’ bucket.

While it cautioned that it would need to conduct a more representative study before making any concrete recommendations on optimal prices, Simon-Kucher & Partners stressed that the results sent a very positive message to streaming providers. Indeed, Billige recommended that companies in all industries review their price elasticities. “This crisis just shows us that it’s never been more crucial to know how customers perceive your products and services when making pricing decisions,” he concluded.