Friday, October 29, 2010

Netflix Pricing Paradox

I'm sure I'm not the first to recognize this (and I'm too lazy to use Google to find out), but Netflix's pricing policy seems a bit odd.

Having one DVD out at a time costs $8.99 a month. The marginal cost of the second DVD is $5 ($13.99 - $8.99). In order, additional DVDs after that cost you an extra $3, $7, $6, $6, $6, and $6.

Usually, businesses give you discounts when you buy in bulk, because their costs are lower. This is reflected in lower-end Netflix plans (i.e., getting 2 DVDs a month costs less than twice as much as getting 1), but why is that fourth DVD (and thereafter) so much more expensive than the third?

Maybe Netflix figures that subscribers with 3 DVDs and below are people like me and Sharon, who have busy lives and often let a Netflix DVD sit unwatched on our coffee table for a week or longer. We are highly profitable customers, so Netflix will let us have yet another DVD lying around for fairly cheap.

Conversely, it's hard to imagine anyone signing up for 4 or more DVDs at a time unless they fully intend on watching them. These people are signaling to Netflix that they'll be mailing DVDs back and forth with great frequency, so Netflix is anticipating a higher per-monthly-DVD cost and thus charging accordingly.

On a related note: we've had the 2-at-a-time plan before but switched to 1 at a time several months ago. Now that baseball is almost over, we might switch back, but it's interesting how much being able to watch an unlimited amount of Netflix's hodge-podge assortment of "instant" movies makes you reluctant to pay for more DVDs.