19 July, 2011

Netflix, Conjoint Analysis, Market Simulation, Voila!

I just took a market research course last week learning about a method called Conjoint Analysis. Basically, it goes like this: Any product or service is comprised of a series of attributes ("features"). Each of these attributes could possess any number of levels ("options"). For example, if you're talking about cars, the attributes might be "brand", "price", "fuel efficiency", "number of doors", "sound system", "type of loan", etc. Each of those attributes has a variety of possibilities... Toyota, Honda, VW... 35mpg, 40mpg, 25mpg... 2 doors, 4 doors, hatchback... and so on. In conjoint analysis, you do a survey where users are presented a series of random combinations of different levels of each attribute, and people pick the best one of each series. If you analyze all the data from a bunch of survey respondents, you will end up having an estimate of the relative importance of all the attributes. For instance, you might find that price is the most important thing for people deciding about what car to buy, followed by brand, and that sound system doesn't really influence their choices much, in comparison.

After you've done a conjoint, you can then do a market simulation. In this process, you can identify a series of hypothetical (or real) products that combine these attributes in specific ways. And you can predict what market share each product would achieve (all other things being equal). For instance, I might determine that a new version of a Toyota Camry that gets 40mpg instead of 30mpg would gain 10% market share over competitors, all else being equal, even though it raises the price of the car by $500 to produce.

So where am I going with all this?

I thought about Netflix recent price hike. And then I thought about the competition. There's really no viable competitor to Netflix right now. A nice article in the Huffington Post summarizes the options. The conclusion is that nothing touches Netflix. And not only does nothing touch Netflix at $9.99/month, nothing touches them at $15.98/month (and probably not even at $19.99/month). If you were to do a conjoint analysis on movie service options, and then consider the market share (and resultant revenue) for a hypothetically more expensive Netflix offering, what you'd undoubtedly find is that a) for modest price increases, there will be no loss of market share, and b) for even sizable price increases, the loss of market share (either to competitors or drop-out) pales in comparison to the increased revenue that results from the elevated pricing.

Tranlation:  Even if Netflix lost a quarter of their customers due to these hikes (which is highly doubtful), they'll still probably increase their revenue by 10-20% (if not more).

If Netflix wants to buy back the karma, the slam dunk would be to increase the availability of titles for their streaming service (which is already pretty good, but could be better). Perhaps even offer specials, such as periodic offerings of newer films on the streaming service (perhaps during off-peak hours), or a pay-as-you-go streaming offer for newer movies (on top of the unlimited basic streaming plan).

Unfortunately, the more likely thing is that they're going to see how this increase flies, and if it does not have significant negative impact, and (big if) the competition doesn't step it up, then I wouldn't be surprised to see yet another rate hike in the 6-12 month time frame. And, in a capitalistic market, why shouldn't they?

Essentially what Netflix has done is to get us addicted to their product, and now start jacking up the cost. Pretty smart marketing for them. And possibly a good time to invest in Netflix, I would think.

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