Netflix's Plans Are Optimized for Profit

Marginal Revolution has a blog post out asking why Netflix (NFLX) seems like such a good deal for people doing the 3 disc at a time plan, but if folks want to increase their disc plan there seems to be no appreciable discount.

"It looks kind of screwy; 3 movies at a time is $16.99 a month but 8 movies at a time is $47.99 a month. After three movies, the average cost of a rental (see the link for the numbers) is either flat or rising. Why go for the 8 movies deal instead of setting up separate accounts and queues, thereby saving money? Why is Netflix encouraging everyone to do the 3 movies a month version of the plan? Why are there no quantity discounts past the 3 movies a month margin?"

I'm not exactly sure why this is the case but there are a bunch of answers that people give on the post.

My own personal guess is that Netflix plans are optimized to provide the most money to Netflix as possible.

Netflix's main variable cost is postage. So an active user costs them more than an inactive user. Netflix loves the person who signs up for the three disc plan and then takes three months to watch their discs. Likewise they probably hate the customer who watches (or rips) their DVDs on the same day they get them and always returns them the next day.

They probably lose money on their most active customers, but make it up with their inactive customers. People who want to push the limit beyond three discs are probably the more active customers and the reason why there is no appreciable discount for taking a greater disc plan is probably due to the fact that they don't want to encourage those active users at all. Heck, they'd probably in fact love to have them quit Netflix and go over to Blockbuster (BBI).

In fact, there is an especially steep jump in price when you move from the three disc at a time plan to the four disc at a time plan. My bet is that four disc at a time users are much more active than the average three disc at a time users.

Personally for me three discs is just about right. I think I'd rather have four but three works for now. I'm not willing to pay an extra $7 a month for one extra disc at a time.

Comments

[deaverb]

The underlying message is Netflix has maintained pretty good pricing in a challenging environment. I'm in the 3 Disc club but it is a relatively poor deal for my family since we keep em too long. However, no late fees; they are prompt; and no car trips (more than the cost of one CD rental these days--and we live in MA; imagine in a state with some real distances...).

Netflix is impressive--right along with iTunes and audible.com (purchased as the ultimate bargain by Amazon, another favorite).