Competition, Pricing (netflix Report)

REZARTA BEGAJ

DR. GEORGE L. DE FEIS

MGT 4551

AUGUST 1ST, 2016

COMPETITION, PRICING (NETFLIX REPORT)

1. Identify all the issues a company should consider when it is setting prices.

Pricing is difficult to determine and there are several factors a business needs to consider in setting a price:

Competition - the relative market shares (or market strength) of competitors influences the prices ceiling and a business can chose to lead in the market or follow the lead shown by competitors.

Product costs – a business cannot ignore the cost benefit analysis to setting a selling price. In the long-term, a business will fail if the price is less than cost, or if its gross profit margin is too low to cover the fixed costs of the business.

Demand and Supply – if there is a high demand for the product, but a shortage of supply, then the business can put prices up.

External factor of the economy – as an entertaining service, Netflix is influenced by recession or growth of the economy.

Customer power and Supplier power – An individual consumer has little bargaining power (though they can take their custom elsewhere). However, an industrial customer that buys substantial quantities of a product from a business may be able to negotiate lower or special prices. Also, suppliers can influence the cost of the good or services produced by the company.

2. Should Netflix be more concerned with the number of subscribers or revenues? Explain.

Both number of subscribers and revenues are very important for Netflix. Of course the main goal for the company is to maximize the profit of the shareholders but if the number of subscribers will decrease with time the market share will shrink and therefor the share value will be less valuable, thus causing loss of revenue for the shareholders.

3. Describe the competitive environment for streaming services and how that might affect Netflix and its pricing decisions.

Netflix has a strong competition from others providers such as:

HBO GO with 114 million subscribers worldwide, spends close to one billion dollars on its original programming budget, and for $15 per month offers a long list of series it has produced and owns the rights too.

Hulu Plus for $8 a month it offers access to an extensive library of video content and generates an average 1 billion dollars annually.

Amazon Prime membership costs $99 per year (or about $8.25 per month), but also includes unlimited, free two-day shipping on many items. You also get access to the company's growing selection of streaming TV shows and movies.

What determine Netflix prices compared to other provides is the streaming selection comparing to other competitors, the quality of the streaming selection with original show and recent movies, the friendly user interface. All these competitive advantages allow Netflix to charge the customer a higher subscription fee comparing to the competitors and still being leader in the market.

4. Review the role global expansion played in Netflix's financial performance. What are the company's future plans?

Netflix had just gone live in 130 new countries in 2016 including important markets such as India, Russia and South Korea. One big exception is China where the company continues to explore options and current investment plans are modest. Two of the company biggest goals for the future are increase of the original content and introduction of HDR (high dynamic range) detail-rich format for content for slowly gaining in popularity 4K televisions. This goals and especially the global expansion has influenced the financial performance by increasing expenditures for shows language support and marketing campaigns in the new markets.

5. Discuss how Netflix is changing or considering changing the way it delivers content to viewers.

During Mobile World Congress 2016 tradeshow in Barcelona, Netflix discovered its plans which change the way it will deliver its products: 1) a large investment on new original content such as the acclaimed Beasts of No Nation, Narcos, House of Cards and Orange is the new black are evidence of the scheme’s success; 2) it will improve the data management and is gearing up to roll out “settings to more effectively manage the mobile data usage; 3) introduction of "high dynamic range," or HDR, which it's a term the public is going to get familiar with in the coming years. Essentially it's a detail-rich format for content for slowly gaining in popularity 4K televisions.