Question

Netflix customers in Australia could soon be facing steeper monthly charges. The popular streaming service on Monday confirmed that it recently tested higher subscription prices for new customers in Australia. The company—which has nearly 100 million global subscribers and expanded to Australia in 2015—has reportedly tested raising prices for new subscribers by as much as three Australian dollars (AU). Netflix’s test resulted in some Australian customers seeing price increases for the streaming service’s Basic plan (going from AU$8.99 to AU$9.99 per month), while Netflix’s Standard plan increased AU$2 to AU$13.99 and the Premium plan increased AU$3 to AU$17.99 per month, according to The Australian. Netflix confirmed the tests, but emphasized that it has not yet formally announced any permanent price increases. “We continuously test new things at Netflix and these tests typically vary in length of time,” the company said in a statement. “In this case, we are testing slightly different price points to better understand how consumers value Netflix. Not everyone will see this test and we may not ever offer it generally.”

Discuss why you think Netflix conducted this test and what you think they found from that test based on their later decisions. Refer in particular to concepts, such as what price elasticity of demand is and how it is calculated and used, its relationship with revenue, and relevant determinants of price elasticity of demand.

Criteria
Analysis of why Netflix would engage in this test
Discussion of what can be inferred from their decision to implement it permanently
Discussion of the determinants of elasticity relevant to the case of Netflix

Answer 1

Netflix conducted this test to know price elasticity of demand. In other words they wanted to know appropriate price of their service. This will help them in revenue and profit maximisation.

If they implement it permanent it shows net prices have led to greater profit and revenue

The elasticity here depends on presence of alternative services, preferences of customers, income of consumer, proportion of income of consumer diverted to it, it being non essential good, and brand loyality