Netflix: the trade-offs behind paid sharing

Netflix warned investors to expect cancellations, tested in four countries, delayed to fix account features, then rolled out paid sharing in over 100 countries. What its letters reveal.

A price change is never only a finance decision. It tells customers what you think your product is worth, who it is for and what you expect of them.

Netflix’s move against password sharing in 2023 is one of the best-documented plan changes in recent years. The company described its expectations, its test markets and its results in public shareholder letters.

The problem Netflix named

In its letter to shareholders for the fourth quarter of 2022, Netflix said widespread account sharing, which it put at more than 100 million households, undermined its long-term ability to invest in the service.

It acknowledged that this was a change for members who shared their account more broadly, even though its terms of use limited Netflix to one household.

Netflix also set expectations early. Based on its experience in Latin America, it said it expected some “cancel reaction” in each market when paid sharing launched, affecting short-term member growth.

Test, learn, then roll out

Netflix did not launch everywhere at once. Its first-quarter 2023 letter reported launches in Canada, New Zealand, Spain and Portugal.

It said it saw a cancel reaction in each market when the news was announced. But as people borrowing accounts set up their own, and existing members paid for “extra member” slots, acquisition and revenue increased.

Netflix called Canada a reliable predictor for the US. It said its paid membership base there had grown larger than before paid sharing launched, and that revenue growth had accelerated.

The letter also explained what Netflix learned. Members cared most about watching while travelling, controlling who used their account and transferring profiles to new accounts.

Netflix said it could have launched broadly in late Q1, but delayed to Q2 to improve those features. It accepted that this would shift some growth into a later quarter.

The result

In its second-quarter 2023 letter, Netflix reported that it had launched paid sharing in more than 100 countries in May, representing more than 80% of its revenue base.

It said the cancel reaction was low, sign-ups already exceeded cancellations, and revenue in each region was higher than before the launch. Paid net additions were 5.9 million in the quarter.

The same letter shows Netflix shaping its plan line-up at the same time. It said it was phasing out its Basic ad-free plan for new and rejoining members in Canada, and was doing the same in the US and UK.

The trade-offs

Netflix’s letters are candid about costs as well as gains.

Short-term growth. Each launch produced cancellations before the gains appeared. Netflix warned investors in advance, which made the dip easier to interpret.

Engagement. The Q4 2022 letter warned that engagement measured by third parties could fall as some borrowers stopped watching.

Price increases on hold. The Q2 2023 letter noted that Netflix had generally not raised prices in its largest markets since the first half of 2022, limited during the paid sharing rollout.

Customer goodwill. Netflix built new account controls and profile transfer before asking people to pay. That investment was part of the price change.

What marketers can learn

Netflix is a large consumer brand with unusual data. Its results do not predict how your customers will react. But the way it managed the change is a useful pattern for any business.

Frame the change around a principle

Netflix linked the change to investment in the service. Whether customers liked it or not, the logic was clear and consistent across every letter.

Say what you expect before it happens

Telling investors and staff to expect cancellations made those cancellations a sign the plan was on track, not a crisis.

Test in markets that predict your core market

Netflix chose Canada partly because it believed Canada would predict US behaviour. Choose test segments for what they tell you, not for convenience.

Fix the friction first

The delay to improve travel, account controls and profile transfer cost Netflix a quarter. It also removed the most likely reasons for anger.

Measure the full result, not the first week

The early cancellations were real. The relevant measure was membership and revenue after people had time to adjust.

Applying it to B2B and services

Business buyers react to plan changes differently. Contracts, procurement cycles and switching costs slow the response, which can hide problems for months.

Hypothetical: an Estonian accounting software firm wants to stop customers sharing one login across an entire finance team. Following Netflix’s pattern, it would explain the principle, add an easy way to invite extra users, test with a small region first and warn its board to expect some churn before seat revenue rises.

The details are illustrative. The sequence of principle, preparation, test and honest forecast applies widely.

Questions to test your own plan change

Before you take a change like this to leadership, work through six questions. They are drawn from the pattern in Netflix’s letters, not from a Netflix checklist.

1. What principle explains the change? Write it in one sentence a customer could repeat.
2. Who loses most? Identify the customers who will feel the change hardest and decide how you will treat them.
3. What must be fixed first? List the features, policies or support steps that would remove the most likely complaints.
4. Where will you test? Pick a segment or market whose behaviour predicts your main market.
5. What dip will you accept? Agree the expected short-term loss in advance, and how long it may last.
6. When will you judge it? Set the date and the measures for the real verdict.

The question to ask

Before any price or plan change, ask what the change says about your product. Netflix’s message was that its service was worth paying for in every household that used it.

If you cannot state your message that simply, customers will write it for you.