In the perfect market, aggregate supply and demand determine the best price for a product based on what sellers are willing to charge and buyers are willing to pay at various quantities. For producers, the ideal way to eliminate consumer surplus, or the amount that some consumers were willing to pay but didn’t have to, would be to sell to each customer at a different price. Netflix, Inc. (NASDAQ:NFLX) may be in a prime position to institute a program like this.
Brian Fung over at the Washington Post takes a look at some recent research by Brandeis University economist Benjamin Shiller in order to see what would happen if Netflix, Inc. (NASDAQ:NFLX) began charging different prices to different consumers. In the model, Netflix uses data about web browsing habits in order to decide the price to charge consumers.
Price discrimination
In the analysis, “Using all variables to tailor prices, one can yield variable profits 1.39 percent higher than variable profits obtained using non-tailored 2nd degree price-discrimination.” Netflix, Inc. (NASDAQ:NFLX) could make more money from offering different prices to different consumers. The question is whether or not the practice would be a danger to Netflix, Inc. (NASDAQ:NFLX) profits.
Some say that this kind of price discrimination results in consumer dissatisfaction and price confusion, but it doesn’t have to. The internet has several individualized targets that track browsing data as well as location and many other pieces of data. The most notable are Gmail and Facebook.
Netflix, Inc. (NASDAQ:NFLX) would leverage these services in order to deliver targeted sales to consumers. Only consumers who get the email are able to sign up, and they’re getting a special offer. The system works akin to PC gaming downloads, where the base price is large but there are constant sales for those unwilling to pay premium prices.
Netflix revenue problems
Netflix, Inc. (NASDAQ:NFLX) currently charges $8 per month to viewers in the United States and it has a great reputation. The company will eventually reach a bottleneck where the market is saturated. It will not be able to raise revenue at home without raising its prices. That move will see at least some customers leave the service.
Targeted pricing using Big Data is an ideal way for Netflix, Inc. (NASDAQ:NFLX) to bring in extra revenue. If it can manage a way to do this without alienating its customer base, there’s no downside for the company.
