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Strong Brands Create Price Inelasticity

Can you think of something you buy today that's doubled in price over the last five years... and yet you remain a happy customer?


For me, that something is Netflix.


In February 2017, I was paying $11.99 a month (all in) for access to the streaming service.*


And next month, I expect to be paying $23.71.


That's because according to the CBC, Netflix is raising prices for standard and premium plans in the U.S. and Canada. As a Netflix subscriber, I haven't yet received a price increase notice -- the article states, "Existing members will see the new prices in the coming weeks when they receive their monthly bills -- but the Netflix website has already been updated with the new prices that new subscribers will be subject to immediately.


I'm on the premium streaming plan, so my Netflix bill last month was $18.99/month + HST.


As soon as the price increase takes effect, my bill will be $20.99 / month + HST... which is pretty close to double what I was paying just five years ago.


(For anyone thinking this is simply the result of inflation... it's not. According to the Bank of Canada's inflation calculator, $11.99 in 2017 is equal to $13.17 in 2021.)


Am I upset about having to pay twice as much as I used to pay just five years ago?


Much less so than you might think, actually.


You see, I was an early adopter of Netflix. As an entertainment lover, I eagerly subscribed to the service as soon as it became available in Canada, back when 100% of their content consisted of old movies and TV series licensed from big studios. At that time, many people thought even $8/month was too much to pay for what you got, but not me: I was thrilled with the idea of all-I-could-watch entertainment, and would often say Netflix could double their prices and keep me as a happy customer.


Well, it seems Netflix was listening.


It should be noted that this isn't the first price increase the company has taken in the past decade. They've taken quite a few. And each time subscribers get a price hike notice, Netflix justifies it by stating the extra money will be used to continue investing in great content.


But have they lived up to that promise?


Absolutely. The company may have been built on other people's content, but today, 40% of the content available to US subscribers is now a Netflix Original. The company's investment in original programming has given us addictive, buzz-worthy series like Squid Game, Ozark, Bridgerton, The Witcher, Stranger Things, Maid, The Queen's Gambit, The Umbrella Academy, Orange is the New Black, The Crown... and I could go on, and on, and on.


So do I love the idea of paying more for my monthly service? Of course not.


But I love the service that Netflix provides, and continue to believe it represents exceptional entertainment value. And as such, Netflix has created a type of price inelasticity for me.


To be clear, it's not true price inelasticity, like the kind that occurs with true necessities like gasoline for car owners or internet service for knowledge workers. When the costs of those things increase, people tend to get upset; they don't want to use these things, they have to use those things... so they don't have any alternative to absorbing the higher prices.


Netflix is different. I don't literally need the service... but it feels like I do because of how much I love it. The brand has fostered that love over time, and as a result, I've become far less price-sensitive to the cost of the service than I would otherwise be.**


Put another way, Netflix has succeeded in manufacturing price inelasticity: the result of a great brand continuing to exceed my expectations as a customer.


Strong brands create price inelasticity.


If you're in the business of selling products or services to others, think about what can you do to build your brand so well that your customers aren't bothered when you raise your prices.


 

* I checked my old credit card statement to be sure. And by the way, this was an "all-in" price because it wasn't until 2021 that the government decided digital services and goods sold by foreign companies should also charge HST, thereby making life fairer for all Canadian content companies and 13% more expensive for all digital-savvy Canadians.


** There's almost certainly a Netflix price point that would make me cancel my subscription; one where I feel what I pay is no longer justified by what I get. I just don't know what it is. But... let's keep that between us, okay?

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