Netflix pricing disparity

I’m a little confused as to the unit pricing for Netflix. Their “unlimited” plans are as follows:

  • 1 at a time = $8.99/mo = $8.9900 each
  • 2 at a time = $13.99/mo = $6.9950 each
  • 3 at a time = $16.99/mo = $5.6633 each
  • 4 at a time = $23.99/mo = $5.9975 each
  • 5 at a time = $29.99/mo = $5.9980 each
  • 6 at a time = $35.99/mo = $5.9983 each
  • 7 at a time = $41.99/mo = $5.9985 each
  • 8 at a time = $47.99/mo = $5.9987 each

Clearly the best deal is the 3-at-a-time plan, but why give the customer a slightly worse deal for each level they go up? Currently, upgrading to the 4-at-a-time plan has quite a premium, $7, for the additional movie. Each additional movie after that is a negligible but still annoying bump in price. The 6-at-a-time plan is the worst deal, since you can get two 3-at-a-time plans for $2.01 less per month.

6 thoughts on “Netflix pricing disparity

  1. Jud is correct.

    The reason they price the “more DVDs out == higher prices per DVD” is because subscribers who have a lot of DVDs out at one time are actually *bad* customers for Netflix (on a “per-disc” basis). Why? Subscribers who have a large number of DVDs out at once result in Netflix needing to buy more inventory to satisfy the same overall demand for a specific disk.

    Specifically, assume that user X has a two DVDs at once plan, while users Y and Z have one DVD at a time plan. Let’s also assume that two separate DVD releases (A and B) are in high demand (e.g. two recent big box-office hits).

    If both Y and Z have A and B in their queue, then Netflix can send A to Y and B to Z, satisfying both users, while needing to buy only one copy of each disc.

    However, if user X wants both A and B, while users Y and Z also have A and B in their queue, it’s possible for user X to “starve” users Y and Z of their choice by holding on to A and B. Netflix, to satisfy the user base, needs to buy an extra copy of A or an extra copy of B, to keep more than just user X happy.

    Consider taking this to the extreme. Let’s say Netflix sold an “unlimited DVDs out at one time” plan for $10,000 a month. A user who subscribed to the $10K/month plan could conceivably request *all* of Netflix’s current distinct DVD releases. To satisfy any other subscriber requests, Netflix would have to buy at *least* two copies of every disc, even if all the other subscribers had unique DVDs in their queue.

    Obviously the examples above are greatly simplified, but I’d be willing to predict that the cost (y) to Netflix of a customer with a “x discs at once” plan is a function y = f(x^(1+epsilon)), where epsilon > 0 (i.e. more than linear). If you assumed the price for each disc was constant (say m), then the profit would be mx – k – f(x^(1+epsilon)), where k is the fixed overhead cost for each customer. Differentiate and set equal to 0 for various assumed values of epsilon, and you’ll see why Netflix ends up setting their prices as they do.

  2. “4 at a time” is not the same as “4.” While 4 is only one more than 3, “4 at a time” is probably more like four more than “3 at a time,” so your “each” number is way off.

    Let’s assume it takes one week to turn around a DVD on average. That is, Netflix mails me a movie on Monday, I get it on Tuesday, and for whatever reason I don’t send it back until Friday or Saturday, so they get it on Monday and mail me a new one, and so on. With “3 at a time,” that’s 3 discs per week, or 12 per month (in February, at least). With “4 at a time,” that’s 4 discs per week, or 16 per month.

    The costs, then, are $1.42 per disc on the “3 at a time” plan, or $1.50 per disc on the “4 at a time” plan. Still heading in the wrong direction based on the arbitrary values I chose, but much closer. Obviously tweaking the dates a bit would move the numbers around.

    As far as why there’s a big difference between “3 at a time” and “4 at a time,” the outlier is not the “4 at a time” plan, but the “3 at a time” plan, which has had the price lowered repeatedly to compete with BBuster.

  3. Hi Phillip,

    I never claimed any sort of meaning to “each” other than purely dividing the cost by the number of disks at a time. Try not to take things so literally. Yes, I have a Netflix account, and I use it, and we get more than 3 per month. Duh.

    I’m well aware that the 3-at-a-time plan is the outlier. My only point is that the pricing no longer makes sense at the upper levels, and they need to update the pricing. The above math is courtesy of me looking into upgrading to the 4-at-a-time plan, noticing some weirdness, and blogging about it.

    Regards,

    Jeremy

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