Netflix’s price hike: How much is too much for consumers?

Netflix has been on a spending spree for talent and content, so it should come as no surprise that the streamer announced on Tuesday that it is raising its monthly fees by $1 to $2, depending on the subscription plan.

Two dollars may not seem like a lot for some subscribers. But is there a price point that would be too much for users to pay?

The answer is no, but with a caveat: as long as Netflix offers content that’s worth the fee.

“If you keep adding more content that people like then the price point is a moving target,” BTIG media analyst Rich Greenfield told CNN Business. “There isn’t really a ceiling.”

What if Netflix charged $50? Would that still be a deal for consumers? According to Greenfield, the answer again depends on what the company offers.

“No, $50 a month with the current set of content would not be a compelling offer,” he said. “But if you told me that Netflix had ‘Monday Night Football’ and the Major League Baseball contract, maybe $50 is the right price.” (Netflix has not shown an interest in bidding for sports or much else in the way of live content, for the time being.)

Related article 2019 is the year the streaming wars get real

It’s more than just a thought experiment, however. The answer to this question could determine the viability of Netflix’s content strategy. Netflix spent at least $8 billion on new content last year, based on the company’s own expectations from 2017. Legacy media companies such as Disney and tech companies like Apple are gearing up to launch their own streaming services. All of this amounts to more pressure on Netflix to reverse its negative cash flow to appease investors and to keep churning out prestige content like “Roma” in order to stay competitive with rivals.

Netflix announced on Tuesday that all three of the company’s plans will go up. The standard $10.99 plan, for example, will increase to $12.99 per month. Its $7.99 plan will go up to $8.99 and its $13.99 plan will go up to $15.99 a month.

Ravi Dhar, the director of the Center for Customer Insights at Yale School of Management, explained that $15 may seem like too much to pay for breakfast, but it really depends on how competitors are pricing their breakfast. Consumers think about value of a product based on other how similar products in the market are priced, Dhar told CNN Business in an email.

“Netflix prices, compared to the value it provides, is still attractive if you look at Hulu, HBO, etc., so Netflix has decent room to charge somewhat higher prices.” Dhar added. “How much does a movie cost in a theater? Compare that to how much content people watch on Netflix and its cost. It is still far more economical and easy to justify.”

Hulu charges $7.99 a month and $11.99 for its ad-free plan. HBO Now costs $14.99 a month.

Ted Sarandos, Netflix’s chief content officer, also believes there is a connection between price and content, saying that “it’s about providing enough value to the consumer that they see it as a good value relative to usage and what it costs.”

“If they’re enjoying hours and hours of programming and a lot of shows, and we’re meeting the need, they’ll think it’s of great value,” he told Vulture in an interview last April. “And if they don’t, they won’t. So it’s figuring out the right balance for each user.”

But as more and more streaming services pile up, there’s also the question: Is there a limit to how many streaming services a consumer is willing to buy?

Magid, a research-based media firm, reports that consumers are willing to pay an average of $38 per month for streaming services and they’re willing to subscribe to an average of six services.

Bird Box

Related article Netflix is raising its subscription prices

“That total still equals less than what people are paying for traditional cable or satellite packages,” said Jill Rosengard Hill, an executive vice president at Magid. “Today, millennials who subscribe to more streaming services are used to actively managing their subscriptions and share of wallet that goes to video content.”

Hill believes that there’s room for Netflix to charge $1 to $2 dollars more per month, but after that Magid’s data shows that consumers are more likely to cancel other services before they cancel Netflix.

“Netflix is the 800 lbs. gorilla in the streaming world,” Hill said. “They are releasing new shows weekly at an alarming rate to acquire and retain subscribers, forcing other players to focus on aggressively marketing and differentiating their own offerings.”