Netflix Price Increase Is Top Reason Customers Are Fleeing

Netflix is in trouble, and a recent price hike is not helping. This is a company that built a business model which nearly destroyed competitors like Blockbuster. However, turnabout is fair play, and new competition is now putting the heat on Netflix. On top of that, Netflix is also a victim of its own success. AYTM surveyed Netflix customers to learn what they think about the 60% Netflix price increase that caused 1 million subscribers to cancel their accounts over the past few months. The results make the answer quite clear.

How Did Netflix Lose 1 Million Customers?

First, here's some back story -- when Netflix launched its DVD mail subscription service with low prices, no shipping costs, and complete convenience, consumers responded in droves. For the past 12 years, Netflix has gained subscribers every quarter except for one quarter in 2007 when it lost a mere 55,000 customers -- a drop in the bucket for Netflix.During that time, Netflix experienced massive growth with its stock growing 10-times over. However, the writing has been on the wall that troubles were coming for Netflix. With more competitors entering the streaming video market (Amazon and Google are both expected to become formidable opponents in this space) and cheaper options emerging for DVD rentals ($1 per night from a Redbox machine), Netflix is facing a form of competition that didn't exist when the company debuted.Concurrently, streaming movie and content providers watched the demand for streaming movies and videos grow. As a result, they want more money for content licensing agreements. As CNNMoney reported, "Netflix's streaming content licensing costs will rise from $180 million in 2010 to a whopping $1.98 billion in 2012." Netflix needs to offset that price increase or its earnings will take a big hit.

The Change that Drove 1 Million Subscribers Away

Licensing costs aren't going to decrease and competition will surely increase. Netflix knew they were headed for trouble and made its most significant change in July when it increased subscription prices by $6. The change enabled Netflix to separate streaming subscriptions from its newly named "Qwikster" DVD-only subscriptions business. Customers who want both subscriptions now must pay $16 per month rather than $10 per month.At the same time, Netflix is losing streaming licensing accounts with Starz being the first licensing partner to leave (which won't be effective until March 2012) because Netflix refused to pay the higher prices Starz demanded for its content. Licensors have little reason to drop their prices for Netflix anymore. There are other players in the market now that they can sell their content to. That's a big problem for Netflix because customers already think its streaming selection is poor.As a result of the significant price increases, Netflix lost 600,000 customers between the July 12, 2011 price hike announcement and the end of September 2011. The company had projected it would end the third quarter of 2011 with 25 million customers (down from its actual 25.6 customers in June). However, the company adjusted that number and now expects to have just 24 million customers at the end of September.As you can imagine, stockholders are not pleased, and the Netflix stock was down by as much as 26% after the company announced its new customer predictions. That drop equates to more than a $6 billion drop for investors (on paper). Of course, Netflix is quick to point out that its earnings won't be negatively affected. In fact, Netflix expects to make between $10 and $25 million more from its customers during the third quarter of 2011 than it did during the second quarter. The question is whether that will continue in the future.

Netflix Customers Speak Out

AYTM researched Netflix customers who had an active account at some point during the past 6 months to find out how the feel about the price increase and if it affected their subscriptions. The results are very interesting:

• 1 out of 4 respondents canceled their Netflix account during the past 6 months.
• 89% canceled their Netflix accounts because the price increase was too high or they didn't use Netflix enough to justify the higher cost.
• 8.6% canceled their Netflix accounts because they think the selection is poor.

When respondents who had canceled their Netflix accounts during the past 6 months were asked what Netflix would have to do to get them back, the responses were equally clear:

• 61% said Netflix would need to lower the price.
• 37% said Netflix would need to offer a better and wider selection of streaming content.

Clearly, Netflix has not found the price/content balance that consumers want. As one survey respondent said, "If Netflix streaming had better options, I would consider paying that much [i.e., the new, higher price]."Despite customer complaints and account cancellations, Netflix has no plans to decrease its pricing structure. As Michael Liedtke of the Associated Press reported, "In announcing its lowered subscriber forecasts Thursday, Netflix emphasized it considers its new prices to be 'the right long-term strategic choice." On September 18th, Netflix CEO Reed Hastings sent an apology email to customers and published that apology on the Netflix blog. However, the apology was not well received. Within 24 hours of the blog post being published, tens of thousands of consumers had published comments to the post expressing their anger and disappointment.Considering customers are leaving in large numbers and the streaming selection doesn't appear to be getting any better, Netflix is far from out of trouble yet. This is a company that needs to conduct some serious research to identify the sweet spot for pricing and selection before it's too late.You can get the complete AYTM survey results below.

Image: GlobalX