Netflix, inc

I Exploring Supply and Demand for the product

  1. Demand

In economics, demand refers to the quantity of goods that the customers are willing and also able to buy from the firm over a specified period of time and price(Boyes & Melvin, 2013). According therefore to the law of demand, the higher the price of a specified commodity, the less the consumers will be willing or able to purchase (McEachern, 2014). (Figure 1)

Figure 1. Demand Curve

This means that the demand of a product is inversely proportional to the price offered by the firm.

In Netflix Inc. the trends in demand of internet television services over the last one year has been seen to decline. This is related directly to the directive made recently to increase the monthly subscription from $1 to $2 per month. This means that whereas the company aimed at increasing its revenue resulting from the subscription, the number of people who were willing to subscribe to their product decreased.

The implication of this decrease in demand was that the growth in revenue reduced dramatically for the company as shown by the reduction in the annual sales from Table 1.

Table 1. Revenue from Subscriptions.

Time Period Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
Revenue from Subscription $173,200 $164, 018 $157, 527 $150,995 $144, 747 $138, 732

Adapted from: https://ir.netflix.com/results.cfm

  1. Supply-Demand Analysis

According to reports from the company, the subscribers’ growth in the last one year has been on the decrease. The projected growth in subscribers at the beginning of 2015 was 3.7 million by mid-2016. However, the actual subscribers currently are just over 3 million. This undershoots the targeted value by over 700,000 subscribers.

A comprehensive analysis of this shows that the reason for poor target is the increased subscription fee. Figure 2 compares the projected growth to the annual growth.

Figure 2. Projected and Actual Trends in Demand.

Adapted from: https://ir.netflix.com/results.cfm

As shown from this data, there is the need for the firm to adopt a new strategy to attract subscribers and increase its revenue. Actions that are likely to facilitate this increase in growth would be to facilitate loyalty and reward systems to subscribers who would be granted free viewership for a specified period of subscription (Anastasia, Boldog, O’Keefe &Tinoco, 2016).

II The Price Elasticity of Demand

  1. From the data represented in this case, there is an increase in the number of subscribers for Netflix services (over 1 million subscriber since the beginning of 2015). This means that the company cannot be said to be doing badly in the industry. However, the increase is at a decreasing rate. There is an annual decrease, therefore, in the quantity demanded. Over the period, the percentage decrease would be calculated as;

The increase in price of subscription for this period calculated as;

The price elasticity in demand is therefore;

The percentage Change in Quantity demandedpercentage Change in Price

Doing the math, we have 23%/12.5% = 1.84.

This value of price elasticity of demand (> 1.0) show that the demand is elastic. The consumers are therefore very sensitive to changes in price of the subscription. Owing to the availability of cheaper substitutes this sensitivity is not a good indication for the company.

  1. The responsiveness of the consumers is related to the availability of information related to changes in prices and also the comparable benefits of using substitutes. In addition, it is also affected by the ease and affordability of switching from one service provider to another and hence the related elasticity of demand for the services.
  2. The pricing decisions of the firm will depend on the profit margins associated with the changes in the company and its subscribers. The elasticity of demand as observed indicates that there is need for the company to consider a gradual change in prices rather than abrupt changes that causes the rather sensitive subscribers base to react almost immediately. In addition pricing decisions should involve the company’s stakeholders including the consumers.
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