Key strategic issues
Prior to 2008, Netflix had successfully dominated the DVDs-by-mail industry by developing an effective network of distribution centers that made delivery of over 120,000 titles across the United States in one business day possible. In recent years, technology has advanced to the extent that household are rapidly shifting from renting physical DVDs to watching movies and TV shows streamed over the Internet to over 700 different devices. While the company has benefited from a phenomenal increase in the stock price, revenue and the amount of subscribers, a series of strategy changes and new initiatives in July of 2011 led to a downward spiral for Netflix.
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An alternative for Netflix is to provide two differently priced bundle packages with different limitation in addition to offering individual services. As more and more users have upgraded to high-speed or broadband Internet service and devices that allow video streaming, the focus of Netflix should be how to capture more subscribers to instant streaming as that is the evolving trend of recent years. It isn’t long before DVDs in general become obsolete and therefor it is important for Netflix to gradually shift its concentration away from that segment of the market. The pricing of its services can greatly assist in this task. As the evolving trend is rapidly shifting more toward streaming with more than 700 devices capable of streaming content from Netflix, it is obvious where the company needs to exert more focus. Instead of charging customers $9.99 for unlimited DVD by mail and unlimited streaming, the limits should be altered but the price should remain unchanged. Netflix needs to remove the unlimited feature for DVDs and charge $9.99 for limited DVD by mail and unlimited streaming versus $13.98 that would have been charged based on the 2011-2012 subscription plans pricing.
Those customers who prefer the luxury of unlimited DVDs by mail and have an inelasticity of demand should pay a premium price of $15.98 for the bundle package or $7.99 individually. As there is usually a higher cost associated with the logistics of DVDs by mail as a result of rising fuel cost globally, it is well justified to charge a higher price in an effort to offset the increases in supply chain cost. This is a good alternative for Netflix because it allows the company to steer consumers in the direction they want.
The strategy behind this pricing structure is to gradually reduce the amount of DVD by mail customers through elasticity of demand for DVD’s while increasing the amount of subscribers to video streaming. The wave of the future in the market for watching movies and TV shows is unquestionably through Internet-connected TV’s, computers and mobile devices. If the market is shifting, there is no reason why Netflix should resist this shift. The company should find innovative strategies to adapt to avoid being left behind. Another strategic alternative for Netflix is to not implement separate websites for DVD’s by mail and video streaming. The ability for customers who prefer DVDs to receive them and stream as many movies and TV episodes each month from an integrated website for a relatively low price has created a great deal of competitive advantage for the company. Despite the disadvantage that streaming and DVD by mail have very different operational requirements and cost structures, the two must operate interdependently to maintain continued simplicity for the user. Within the span of 18 month from January 1, 2010 to June 30, 2011 the company was able to successfully increase subscribers, quarterly revenue and quarterly operating income...