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Question: 1 in 2016 netflix allowed its prices to increase for...

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Netflix Price Increase Hurts Membership Netflix experienced some membership turbulence in 2016 as a price increase was phased in for its US subscribers. In May 2014, Netflix announced that the price of its standard subscription service would increase from $8 to S9. However, established customers were allowed to stay at the S7.99 price for two years. In 2015 Netflix increased the standard price to $9.99. As a result of the pricing plan and the deferred price increase, in May, 2016, the standard pricing plan for long time customers of Netflix increased from $7.99 per month to S9.99 per month. Netflix began notifying customers in April that the price increase would become effective in the second quarter. Netflix was trying to implement price increases more slowly after a 2011 increase led to negative publicity and a customer backlash. In that case, Netflix separated its streaming and DVD services, and charged separately for both services. However, regardless of the implementation of the price increase, the higher monthly prices seem to have impacted the growth of membership among US subscribers. In the two quarters before the price increase, Netflix added net membership of 1.6 million and 2.2 million members. By contrast, the number of members added in Q2 was only 160,000, and in Q3 only 400,000. The Q2 growth in US subscribers was the lowest since Netflix began reporting those numbers in 2012.US Streaming (millions) Revenue Contribution Profit Contribution Margin Paid Memberships Total Memberships Net Additions Q2 2015 1026 340 33.1% 41.1 42.3 0.90 Q3 2015 Q4 2015 9 1064 344 32.3% 42.1 43.2 0.88 1106 379 34.3% 43.4 44.7 1.56 12016 1161 413 35.6% 45.7 47.0 2.23 Q2 2016 1208 414 34.3% 46.0 47.1 0.16 3 2016 1304 475 36.4% 46.5 47.5 0.40 Monthly Revenue per Paid Member Percentage Chg. Rev Percentage Chg Memberships $8.33 $8.43 $ 8.49 3.9% 8.47 $8.75 4.0% 9.40 7.9% 3.7% 50% 2.5% 3.2% 5.3% 05% 0.9% Source: Netflix 10Q Q3, 2016According to a MarketWatch article on the price increase: Netflix said Monday that customers who learned in April that the price was about to increase had begun canceling their subscriptions, leading to unexpected churn. Netflix did not flat-out say in its letter to investors that the price increase led to higher churn among subscribers, however, instead saying it coincided with press coverage of the rate hike and that subscribers misunderstood the news as an impending new price increase rather than the completion of two years of grandfathering. The stock market reacted to news of Netflix price increase as well. The stock closed at $102.23 as of March 3 2016. After the release of second quarter earnings in July, the stock price had fallen to $85.84 per share, a decline of 16%. This decline wiped out almost $7 billion of shareholder value during this period. Most of this decline was immediately following the release of the second quarter numbers. With competition increasing in for streaming services, especially with the growth of Amazon Prime Video and Hulu, the decline in membership growth could be a troubling sign.

1) In 2016 Netflix allowed its prices to increase for U.S. subscribers. Using the data on monthly revenue per paid member in the quarter before the price increase and at the end of the third quarter in 2016, calculate the percentage change. We will use it as a proxy for the percentage change in price.

2) Determine the average membership growth (net additions) before the price increase.

3) Using the projections in the previous question, assuming the growth rate would have stayed the same, how many subscribers Netflix may have expected to add in the 2nd and 3rd quarters of 2016 if it didn't allow the price to increase? How many subscribers did Netflix actually add in the 2nd and 3rd quarters of 2016? Comparting the two numbers how many subscribers were gained/lost due to price increase? What percentage change does it represent relative to the subscribership level in the quarter before the price change (use Total Memberships)?

4) Using the percenage changes in the price and subsriberships calculated in the previous questions, determine the own price elasticity of demand.

5) What do we expect to happen to Netflix's revenue due to the price increase?

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