10/6/2021

REPORT ON PRICE & MARKETING EXPENSE

ELASTICITY OF NETLFIX

Dharmesh Goyal – 301/2021

Rashi Agarwal- 309/2021
Arnav Das- 316/2021
Apoorva Puri- 331/2021
Anmol Kumar Tripathy-336/2021
About Netflix :-
Netflix is one of the world’s leading entertainment services with over 209 million paid
memberships in over 190 countries enjoying TV series documentaries and feature films
across a wide variety of genres and languages. Members can watch as much as they want,
anytime, anywhere, on any internet connected screen. Members can play, watch and resume
watching all without commercials or commitments.
Base year
The base year is selected as 2020, when the world was witnessing a surge in covid-19 cases.
Coronavirus has led to major shifts in the media and entertainment sector. OTT is soaring,
while out-of-home entertainment is reeling under the effects of social distancing.
In this report, we have analysed the effects of covid-19 on price elasticity and marketing
expense elasticity for Netflix. For this purpose, we have used the relevant data for the time
period Q1 2019 to Q2 2021 in order compare the pre covid and post covid results.

Jun Sept Dec March Jun Sept Dec Mar Jun

30,2019 30,201 31,2019 31,2020 30,202 30,2020 31,202 31,202 30,2021
9 0 0 1
Us & -0.017 0.239 0.737 -1.564 5.02 0.079 2.957 0.104 -0.223
Canada
EU, 1.381 6.348 127.84 -4.859 0.955 0.229 -5.851 0.401 0.128
Middle 2
East,
Africa
Latin 0.205 1.355 -1.183 -3.444 -0.876 -3.603 -1.001 0.186 2.336
Americ
a
Asia 2.552 -5.265 -5.011 -4.162 3.551 0.667 -14.627 0.933 3.742
Pacific

June 30, 2019 Sep 30, 2019 % Change Degree of Revenue Test
Elasticity
US and Canada -0.017 0.239 -15.0588 Inelastic Satisfied
Eu, Mid East & 1.381 6.348 Not Satisfied
Africa 3.596669 Elastic
Latin America 0.205 1.355 Inelastic to NA
5.609756 Elastic
Asia Pacific 2.552 -5.265 -3.06309 Elastic Satisfied

Sep 30, 2019 Dec 31, 2019 % Change Degree of Revenue Test
Elasticity
US and Canada 0.239 0.737 2.083682 Inelastic Satisfied
Eu, Mid East & 6.348 127.842 Not Satisfied
Africa 19.13894 Elastic
Latin America 1.355 -1.183 -1.87306 Elastic Satisfied
Asia Pacific -5.265 -5.011 -0.04824 Elastic Satisfied

Dec 31, 2019 March 31, 2020 % Change Degree of Revenue Test
Elasticity
US and Canada 0.737 -1.564 Inelastic to NA
-3.12212 Elastic
Eu, Mid East & 127.842 -4.859 Satisfied
Africa -1.03801 Elastic
Latin America -1.183 -3.444 1.911243 Elastic Satisfied
Asia Pacific -5.011 -4.162 -0.16943 Elastic Satisfied

March 31, 2020 June 30, 2020 % Change Degree of Revenue Test
Elasticity
US and Canada -1.564 5.02 -4.20972 Elastic Not Satisfied
Eu, Mid East & -4.859 0.955 Elastic to NA
Africa -1.19654 Inelastic
Latin America -3.444 -0.876 Elastic to NA
-0.74564 Inelastic
Asia Pacific -4.162 3.551 -1.8532 Elastic Not Satisfied

June 30, 2020 Sep 30, 2020 % Change Degree of Revenue Test
Elasticity
US and Canada 5.02 0.079 Elastic to NA
-0.98426 Inelastic
Eu, Mid East & 0.955 0.229 Satisfied
Africa -0.76021 Inelastic
Latin America -0.876 -3.603 Inelastic to NA
3.113014 Elastic
Asia Pacific 3.551 0.667 Elastic to NA
-0.81217 Inelastic

Sep 30, 2020 Dec 31, 2020 % Change Degree of Revenue Test
Elasticity
US and Canada 0.079 2.957 Inelastic to NA
36.43038 Elastic
Eu, Mid East & 0.229 -5.851 Inelastic to NA
Africa -26.5502 Elastic
Latin America -3.603 -1.001 -0.72218 Elastic Not Satisfied
Asia Pacific 0.667 -14.627 Inelastic to NA
-22.9295 Elastic

Dec 31, 2020 March 31, 2021 % Change Degree of Revenue Test
Elasticity
US and Canada 2.957 0.104 Elastic to NA
-0.96483 Inelastic
Eu, Mid East & -5.851 0.401 Elastic to NA
Africa -1.06854 Inelastic
 Latin America -1.001 0.186 Elastic to NA
-1.18581 Inelastic
Asia Pacific -14.627 0.933 Elastic to NA
-1.06379 Inelastic

March 31, 2021 June 30, 2021 % Change Degree of Revenue Test
Elasticity
US and Canada 0.104 -0.223 -3.14423 Inelastic Satisfied
Eu, Mid East & 0.401 0.128 Satisfied
Africa -0.6808 Inelastic
Latin America 0.186 2.336 Inelastic to NA
11.55914 Elastic
Asia Pacific 0.933 3.742 Inelastic to NA
3.010718 Elastic

COVID-19 and the resulting restrictions on public life have significantly changed customer
behaviour. It is safe to assume that certain products and services, like entertainment
streaming, have a much higher value to consumers than before. During the pandemic,
Netflix’s pricing power has increased substantially. Whereas in the past, a 10 percent price
hike would have resulted in a six percent decline in demand, the same ten percent price
increase now would only drive 1.3 percent of customers away. This shows Netflix pricing has
become inelastic in the recent times.
 Netflix would have room to raise its prices and still rely on strong sales volumes.
 As per a report by the consultancy firm Simon Kutcher & Partners, the price elasticity
for streaming services is at an all-time low.
 There has been a fall in the price elasticity of Netflix from -0.6 to
-0.13. This means that for the same price increase, volume of subscriptions would
now only fall by about a 1/5th of what we would have expected in the past.

Breadth of content more important than price

 A survey of various customers was conducted to know their perceptions about the
factors which influence their purchase decision. When asked to rank the most
important criteria for choosing between different streaming services, breadth of
content available and access to latest releases were the first and second most
important criteria, whereas price was only fourth in importance.

 With social distancing rules and restrictions on public life imposed due to the
coronavirus pandemic, it is no surprise that customers value streaming services like
Netflix now more than ever. And this value translates into a higher willingness to pay
for the service.
Cross Price Elasticity
The cross elasticity of demand is an economic concept that measures the responsiveness in
the quantity demanded of one good when the price for another good changes. Also called
cross-price elasticity of demand, this measurement is calculated by taking the percentage
change in the quantity demanded of one good and dividing it by the percentage change in the
price of the other good.

Exy = % change in Qx/ % change in Py

With homegrown names (Star India’s Hotstar, Viacom18’s Voot, Zee’s ZEE5, Balaji
Telefilms’ ALT Balaji, and Sony’s SonyLiv) and independent platforms like Spuul and
TVFPlay giving tough competition to both Netflix and Amazon Prime Video, Netflix cannot
afford to take prices any further north from where they are currently.

Market Expenditure Elasticity

Marketing Expenditure Elasticity = % Change in Memberships
% Change in Marketing Expenses
Marketing Elasticity Degree of Elasticity
March 31, 2019 0.091 Inelastic
June 30, 2019 -0.113 Inelastic
September 30, 2019 0.014 Inelastic
December 31, 2019 -0.080 Inelastic
March 31, 2020 -0.304 Inelastic
June 30, 2020 0.011 Inelastic
September 30, 2020 0.026 Inelastic
December 31, 2020 -0.018 Inelastic
March 31, 2021 -0.033 Inelastic
June 30, 2021 - -

Source -Statista

 It is being observed that from the year 2019 to 2020, the Advertising expense of
Netflix fell by almost 23%. It can be interpreted that Netflix had the degree of
freedom to reduce its advertising expenses and at the same time not affecting it’s top
line figures.

 The annual revenue figures saw an increase of 24%. This means that the marketing
expenditure elasticity of Netflix is highly inelastic.

 This means that if there is a % change in marketing expenditure by x %, the % change

in no. of paid memberships would be less than x%.  The decision to reduce
advertising expense also showed the strength of Netflix’s brand as streaming boomed
during the pandemic

Conclusion
Video subscription services like Netflix – which have driven growth by similarly creating a
range of services for customer groups with different needs – have performed best in this new
environment, but new competitors including retail heavyweight Amazon and established
media behemoth Disney have also tapped into the market with their own streaming services.
The need to constant entertainment among lock-down has presented streaming services like
Netflix with a golden opportunity to increase their prices, according to a new survey.
Customers would now be five times as likely as before to tolerate a 10% hike, as long as the
breadth of a streaming service’s content was improved.