It has been two years since Netflix’s (NFLX) stock declined significantly due to a slowdown in user additions.

Since dipping in May 2022, the stock is now up 250% and fundamentals are improving.

Recently, the company beat revenue and paid membership consensus. Guidance is up. It seems like the company’s “price tier” strategy is working.

Netflix implemented this strategy around 2013 to cater to different subscriber budgets and needs.

It involved offering different subscription plans with varying price points based on the quality of video streaming and the number of concurrent device streams allowed.

In 2020, Netflix offered three price tiers: a basic plan for $7.99/month with standard definition streaming on one device, a standard plan for $13.99/month with high definition streaming on two devices, and a premium plan for $16.99/month with ultra-high definition streaming on four devices.

Over the years, Netflix has continued refining this tiered pricing approach, adding cheaper, ad-supported plans while increasing prices for other tiers.

For the first time since 2014, Netflix introduced a new plan in November of 2022. And for the first time in its history, Netflix, one of the last ad-free streamers in the market, introduced ads to its service. The Basic with Ads plan came in at $6.99, the cheapest of any Netflix plan to exist.

In April of 2023, Netflix launched an initiative that booted people off of accounts that didn’t match their location. Meaning, that if you were using someone’s Netflix account outside of their home, you could no longer access their account. As a result, Netflix saw almost 6 million new subscribers join the service.

Seemingly out of nowhere, Netflix got rid of their Basic plan for new subscribers in July of 2023, but luckily, existing Basic customers got to keep their plan.

They also renamed the Basic with ads plan to Standard with ads. This was a move to push more people to subscribe to their ads tier following their cracking down on password-sharing.

Right off the heels of the 2023 writers’ strike, Netflix sprang into action once again. In October of 2023, Netflix raised the price of its Basic plan (which is no longer available to new subscribers) by $2, from $9.99 to $11.99.

They also raised the price of their Premium plan by $3, from $19.99 to $22.99. The Standard with ads and Standard plans stayed the same, at $6.99 and $15.49, respectively.

The last time Netflix raised its prices was in January of 2022, marking a trend of just under two-year intervals between price hikes.

This nuanced pricing segmentation allows Netflix to target different subscriber segments effectively and potentially boost revenue through higher average revenue per user.

The strategy seems to be paying off as Netflix is experiencing strong growth in paid memberships and revenue.

In the latest earnings, Netflix’s revenue grew 16.8% and global streaming paid memberships count grew 16.5%.

Netflix is also pursuing a “hybrid strategy” to boost its content offerings and better compete against rivals like Disney+.

This involves the company producing and licensing both original and third-party content. For example, Netflix secured rights to stream the Grand Slam tennis tournaments in some regions.

It is also investing heavily in original sports documentaries and reality shows. This hybrid approach allows Netflix to leverage both in-house creative talent and popular pre-existing IP to attract and retain subscribers.

Netflix still has more upside potential through 2025 driven by continued growth in average revenue per user from price increases and the company’s expanding global footprint.

Although the stock doesn’t appear cheap based on our EEA, the stock may continue increasing with strong fundamental performance attracting investors.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

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