Dimitar Serafimov| Wed Jan 24 2018 CET| News
The notion of inflation and service or product price increases are as old as time – developments must be made and profits must be achieved after all – but are these recent SVOD hikes justified?
Well, in a nutshell, when subscriber growth is rapid, and churn is under control, a subscription price hike may well be justified, and needed, to ensure continued growth and ongoing UX and service development.
If the aforementioned conditions are met, these price hikes shouldn’t affect subscriber growth – it’s a case of demand, improvement and evolution – and if you’re in the right position, consumers will respond in a positive way.
Take SVOD colossus Netflix. The company’s market capitalization passed $100 billion for the first time after adding 8.33 million subscribers in the fourth quarter, which makes it their best quarter ever. Netflix now has 117.6M paying subscribers and they increased the subscription cost of its service twice in the past year!
How does this work? Well asides being hugely established, Netflix has retained its ability to develop or push its original content even further, and boost its international streaming customer base. These are magic ingredients.
While this may send some existing subscribers running to the hills, this price increase actually brings the service in line, price-wise, with many of its competitors.
Amazon just announced that is increasing the monthly cost of its Prime service by $2, hoping to generate an extra $300 million annually, according to Cowen & Co. That comes after Amazon Prime added about 10 million subscribers to its membership program in 2017, raising the total number by 20% to a record 60 million. Amazon strategy is quite specific compared to the pure-play OTT players since the Prime membership gives consumers added value from associated services like free shipping or music streaming.
Buoyed by their subscriber numbers, its competitors are considering similar moves. Hulu has just recorded 450,000 paying subscribers and YouTube TV has hit just over 300,000, sources say.
Another provider in the midst of a price-hiking venture is Playstation, with a reported $10 per month increased to its Vue bundle. Let’s see how that will affect their subs numbers.
A recent report from IBM Cloud Video discovered that consumers are getting incredibly frustrated by technical difficulties, lack of content, and too many ads on existing SVOD services – a plain and simple message that to increase prices, you must deliver quality.
But, if you get it right, and the conditions are right, the potential or growth is great.
Speaking Netflix’s recent price increase, UBS analyst Doug Mitchelson, said on one occasion:
“Assuming no churn, we estimate that a $1 to $2 increase could drive ~$650-700M in incremental revenue in ’18. Assuming modest churn to the base of standard or premium subs, we estimate the overall incremental revenue impact could be ~$510M (7% of ’18E US revenue),” wrote Janedis. “In terms of profitability, we expect the company will invest the majority of the incremental cash flow in programming, maintaining a focus on modest annual EBIT margin expansion (18E: 11%, from 7% in ’17).”
All in all, price hikes are inevitable: SVOD is a business after all. But if you do want to inflate your subscription costs, investing in the right areas is essential – and in today’s world, UX, more original content, international expansion should take priority.
Discover how you can secure a stable revenue stream with SVOD: