Keep it simple and shoppers will happily pay more

I wrote a couple of weeks ago about the power of price (increases) to the financial performance of companies in 2018. I highlighted that the US was now firmly in a price advance phase, having had no price increases of note since the GFC a decade ago. How time flies. I talked about price rises of between 2.5% to 5% flowing through the US economy as more confident shoppers accepted price rises (or fewer discounts) across everything they buy. I noted that we’d have the same levels of prices advances in Australia through late 2018 and into early 2019.

Well, the US reporting season opened last week and top of the “surprise on the upside” list was Netflix. It had again grown its subscriber numbers for its video-on-demand services and increased revenues, helped along by price rises. However, price rises weren’t on average 2.5% or even 5%. The average selling price (ASP) of a Netflix subscriber had reportedly grown 14%. How did that happen?

Well, in Australia Netflix launched in March 2015 with a base price of $8.99. In June of 2017 it took its only price rise to date, driven by the Australian government’s imposition of 10% GST on digital services, and raised the base price 11.1% to $9.99 with two more premium price points of $13.99 and $17.99 — effectively a 20% increase at the top end. Shoppers lapped it up and carried on subscribing, many upgrading to more premium services with new subscribers coming in increasing numbers.  

So we’ve asked the how, but what about the why? Why do shoppers continue to flock to Netflix and why are they happy to take price increases in their stride? Because it’s an outstanding service that is being enhanced by the rollout of ever faster delivery networks with faster broadband and 5G networks.

It’s also a very uncomplicated business compared with its competitors. Netflix buys or creates content and then delivers it to subscribers. It doesn’t do it as an extension of its free-to-air TV business, or an extension of its vast, globally connected data centre network, or an extension of its core telecommunications service. It just serves up video entertainment. Easily.

I once heard a history professor talking about the fact that “complexity kills”. It killed the Roman and British empires and brought down the former Soviet Union. It also kills businesses. In a 2017 report, management consultancy Bain & Company claimed 85% of chief executives believe internal complexity is a greater threat than any external competitor.

So what? Well, I recently shopped online at a global big-box furniture retailer. They deliver an outstanding in-store experience and woefully complicated online shopping experience. After four weeks and 12 attempts to buy an item online it became evident that unless that particular item was in stock in the store allocated to my postcode at the moment I was on their website, it couldn’t be ordered. A store 10 kilometres away from my home may have had the item but it wasn’t available to my postcode, which was served by another store. When I asked the customer service representative about the issue she confirmed that half of her inbound calls were with shoppers having this issue. The retailer effectively has 30 online retail inventories, one based in each store. The complexity had killed the sale.

I bought the item from a pure-play online retailer of furniture 10 minutes after hanging up. I paid 10% more, it was delivered two days later and I was a happy shopper.

Simple.

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