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TODAY’S STORY
13 Sep
,
2022

Why isn't Netflix doing Annual Plans?

Subscription businesses and SaaS usually favour yearly or multi-year subscriptions or contracts for primarily two reasons:

1. Yearly subscriptions are a more stable source of revenue than monthly subscriptions.

2. Users might not build a usage habit in a month or two but they are likelier to build a dependency if they use the software for a year, which means lower churn rates even when the year ends, compared to month-on-month churn. Sometimes, a month is simply not enough time to learn and implement a tool so as to realize its value.

But in the case of Netflix, there are more behavioural reasons as to why they should focus on selling annual plans more than monthly plans.Here are the plans Netflix currently offers:

And here are the plans Disney Hotstar currently offers:

And this is Amazon Prime:

So, it isn't like we are proposing anything new when I say that Netflix should consider focusing on annual plans. The competition is already doing it.

But Raj, what are these behavioural reasons you were talking about? Okay, let's get into it.

When you pay monthly, you are reminded to evaluate your Netflix subscription monthly.

Netflix started with the monthly model because it thought that the lower monthly payments would hide in a person's credit card bill and a subscription that was going to waste would likely be less noticeable to the user than a yearly subscription that's a much higher one-time payment and might make the user re-evaluate.

Let me tell you why this definitely doesn't work for India, even if it may work for certain regions.

First of all, the monthly price for a premium plan is ₹649, which isn't cheap by any measure, especially when compared to competing OTT platforms that charge less than half of what Netflix charges. So it isn't like that monthly subscription is going unnoticed anyway.

In fact, ₹649 being deducted from my account every month forces me to evaluate Netflix's value proposition for me in the last month. But honestly, it is quite difficult for an OTT platform to provide a tonne of value to every person every month, especially when they have multiple subscriptions going on.There are some launches during a year that might make it all worth it, but when you ask a person every month indirectly, "Was I worth the ₹649 you paid for me last month?" the answer will most likely be, "No, it wasn't worth it and I wasted that money last month."

When you pay yearly, you can justify the yearly price with just two or three good shows, standup specials, or Netflix Exclusive movies you watched throughout the entire year. But if you had to evaluate monthly, you'd be hard-pressed to find Netflix delivering any value at all for many months of the year.

As always, content intensity matters more than content consistency. With so many options, quality beats quantity when it comes to habit-formation and memorability. And that kind of quality is hard to deliver month on month for anyone, let alone Netflix.

The result is that users cancel subscriptions and only resubscribe for a month or two when some hot release is doing the rounds on social media, only to cancel their subscriptions again once they're done watching the show. Especially when it is super easy to cancel and then resubscribe, why wouldn't I cancel and just come back on demand, when I feel like it?

(No, releasing episodes weekly might not be such a great idea to prevent this problem.)

Secondly, when you pay yearly you build a habit of at least opening Netflix once or twice a week if not more, to check what's new. Paying an annual price for Netflix feels like an investment and a commitment and the sunk cost aids habit formation.

Compare that with monthly billing where the only habit the user is building is that of payment, not a consumption pattern.

Furthermore, annual plans might allow Netflix to give better prices and higher discounts, making the value proposition a lot sweeter for people who currently keep subscribed throughout the year, but pay monthly.

Largely, no one wants to be reminded every month that they are leaking money to Netflix.

With annual subscriptions, even though the user incurs a heavy upfront cost, they're indirectly conveying their trust in Netflix to come up with one or two spectacular releases in the year to make their investment worth it. They're allowing Netflix more time to prove its worth, rather than being forced to evaluate its value prop every month.

On a related note, Spotify is a great example of a yearly subscription that more than makes up for the money — not because I'm an avid music listener and listen to it every day — but because many of my special moments are aided by the music Spotify supplies. And that intensity of experience is what I remember and pay Spotify for, not how consistently it delivers value on a day-to-day basis.

The same is the case for all content, including OTT platforms.Delivering bangers every month to justify the ₹649 may not be easy, but delivering three bangers in a year may very well justify the ~₹6k I would pay for it in an annual plan.

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