Why Netflix raised prices, explained in one graph

Why did Netflix just impose a price increase on US subscriptions? As the Oscar-winning hit “Golden” from “KPop Demon Hunters” says: “We’re goin’ up, up, up.”

It’s not rocket science. The formula is pretty simple: invest in more content (Netflix is ​​targeting $20 billion in cash spend on content by 2026, up 10%) to attract and retain streaming subscribers, and keep your profit margins up by increasing the retail price.

Under the new pricing, which will go into effect March 26 for new users and roll out to current customers depending on their billing cycle, Netflix’s standard plan (which has no ads and offers streaming on two devices simultaneously) will increase by $2, from $17.99 to $19.99/month. The ad-supported plan goes up a dollar, from $7.99 to $8.99/month, and the premium Premium plan (no ads, streaming on up to four devices simultaneously, Ultra HD and HDR) increases from $24.99 to $26.99/month.

But the question is: why now?

First, it would be hard to imagine that Netflix would have pulled this pricing lever — raising rates for its roughly 86 million U.S. customers — if the deal to buy Warner Bros. takeover was still ongoing. That deal would require approval from the Justice Department and other regulators, amid accusations from David Ellison’s Paramount Skydance (the winning bidder for Warner Bros. Discovery) that the combination of Netflix + HBO Max would create a monopolistic entity in the streaming biz.

Netflix strongly disputed this, claiming that with the addition of HBO Max it would have had a roughly 21% share of the US subscription streaming market. However, the prospects of a Netflix price increase while the WB deal was pending would be dire, especially after co-CEO Ted Sarandos testified at a Senate hearing that “we will give consumers more content for less” through the Warner Bros. deal. (Sarandos meant that Netflix would have bundled its service with HBO Max at a price discount.)

Without the need to worry about such events in the midst of a massive M&A deal, the reason why Netflix feels confident pushing up prices in its biggest market is illustrated by this chart from Wall Street analyst firm MoffettNathanson. It estimates revenue streams generated in 2025 as a function of total hours viewed.

In a nutshell, this shows that Netflix offers the best value for money of this cohort: it earns 48 cents per hour watched, lower than anyone else. That indicates that Netflix not only has an advantage in terms of ad revenue over the others, but also has room to raise its prices from a competitive perspective.

Even with the new price increases, Netflix will continue to do that still have an industry-low revenue/hour viewed metric (call it in the 50 cents per hour range). As MoffettNathanson analysts put it, “Netflix delivers significant value to its subscribers, generating more revenue over time.”

Note that all of Netflix’s competitors have also recently raised prices. Disney+ and Hulu, HBO Max and NBCUniversal’s Peacock raised prices last year, and Paramount+ raised prices in January. Next month, Amazon’s ad-free Prime Video tier (now called “Ultra”) will increase to $5/month.

And Netflix’s new prices, while higher, keep it roughly in line with the rest of the field. Indeed, the ad-supported tier remains cheaper than Disney+, Hulu, HBO Max, and Peacock (and is now the same as Paramount+ with ads):

Netflix’s launch of the cheaper ad-supported option, first introduced in November 2022, gave it an important tool to reduce churn as it increases the price of its standard (no ads) subscriptions. Instead of offering customers a take-it-or-leave-it price increase, Netflix can now steer customers with the standard package toward the cheaper package with ads. In theory, the company is agnostic about which subscription someone chooses: advertising revenue should make up the difference in subscription costs.

Netflix executives once vowed not to implement an advertising model, claiming it provided a substandard user experience. But it’s clear that people are willing to pass on ad breaks if it means paying less – and in the US, Netflix’s Standard With Ads plan costs half the cost of the no-ads plan.

The streaming giant’s U.S. price increases reinforce its long-term strategy, according to MoffettNathanson’s Robert Fishman: It maintains a “wide gap between its highest and lowest tiers to simultaneously maximize revenue from its least price-sensitive subscribers while pushing more price-sensitive customers into its still-nascent ad tier, driving engagement and, in turn, ad revenue,” the analyst wrote in a research note on Friday. “The result is a ‘best of both worlds’ approach that generates value across the full spectrum of its subscriber base and should deliver even higher margins for the leading profitable streaming service.”

Will some Netflix customers cancel due to the latest rate increases? Yes of course. But the math indicates that it will yield higher returns overall, allowing the company to dig an even wider moat against competitors.

Pictured above: Sadie Sink as Max Mayfield in Netflix’s ‘Stranger Things’ season 4

SEE ALSO: US household spending on streaming video services remains steady at $69 per month as 68% now pay for ad-supported tiers