ANALYSIS OF DEMAND, SUPPLY & ITS ELASTICITY - Netflix

ANALYSIS OF DEMAND, SUPPLY
& ITS ELASTICITY ON NETFLIX

MBSA S16 GROUP 2
MBSA191124 LOOGANESH A/L SHANKUPILLAY
MBSA191130 PRAVEENA A/P MUNUSAMY
MBSA191119 NUR ALIYAH AZIZI
MBSA191122 NORSHIMA SHA’ARI

TABLE OF CONTENT

PRAVEENA • CASE STUDY BACKGROUND
• PRICE ELASTICITY OF DEMAND

• CROSS-PRICE ELASTICITY OF DEMAND

ALIYAH

• INCOME ELASTICITY OF DEMAND

SHIMA

• PRICE ELASTICITY OF SUPPLY

LOGAN

MCO: Malaysians stuck INTRODUCTION
at home give Netflix,
Tonton biggest traffic
growth rates against
competitors
BY IDA LIM

KUALA LUMPUR, April 1 —
Video-streaming platforms
Netflix and Tonton enjoyed
the highest traffic growth
rates among other rivals
recently, as Malaysians
heavily spurred demand for
online entertainment while
being stuck at home to slow
the Covid-19 spread, a new
study has shown.

Source: MalayMail.com, 2020

INTRODUCTION

• Netflix is the world's leading internet entertainment service
with 167 million Netflix subscribers (Q4 2019) in 190 countries.
enjoying TV series, documentaries and feature films across a
wide variety of genres and languages. Members can watch as
much as they want, anytime, anywhere, on any internet-
connected screen. Members can play, pause and resume
watching, all without commercials or commitments.

KEY NETFLIX STATISTICS

167 million Netflix Netflix had the highest US Netflix penetration
subscribers (Q4 2019) 85% of US streaming 65%
subscribers subscribe to
60.62 million US Netflix Total Netflix 2019
customer revenue $20.2 billion
59% of US 16-34-year-
5 million UK households olds say Netflix 2019 Netflix net revenue
subscribe to Netflix (Aug indispensable vs 35% of $1.9 billion
2019) those aged 35+
Netflix market cap $163
An estimated 14.4 estimated 37 % of the billion (March 2020)
million Netflix users in world’s internet users
Australia (Q4 2019) use Netflix. Netflix debt $12.4 billion

(September 2019)

Source: January 24 2020 Business Insider US

ELASTICITY OF DEMAND

Presented by:
PRAVEENA A/P MUNUSAMY

ELASTICITY OF DEMAND

• This formula (also known as PED) is used to identify how a
change in price affects the supply or demand of a commodity.

• If people still buy a product/service when the price is
increased, that product/service is inelastic.

• A product/service is elastic when demand suffers due to price
fluctuations.

• Formula of PED = % Change in Quantity
% Change in Price

TYPES OF ELASTICITY OF DEMAND

Perfectly Inelastic Demand - If your PED = 0, price changes do
not affect your product’s demand

Relatively Inelastic Demand - If the % change for demand is
less than the % change of the product’s price

Relatively Elastic Demand - If demand change is greater than
the change in your product’s price

Perfectly Elastic Demand - If demand falls to zero at the
slightest price increase or demand becomes great with a slight
price decrease

REASONS NETFLIX STREAMERS SUBSCRIBE TO
THE SERVICE

Source: Alphawise, 3rd Annual Streaming Video Survey
– More Devices, More Consumption, March 2013

SHARE OF NETFLIX SUBSCRIBERS WHO WOULD KEEP NETFLIX IF THE
PRICE OF THE SERVICE INCREASED IN THE UNITED STATES AS OF
DECEMBER 2018

Source Published by Amy Watson, Feb 11, 2019

ELASTICITY OF DEMAND

• In the year of 2014, Netflix already
increased their price for $1, from $7.99
to $8.99. According to data (Weissmann.
J, 2014), before they increase the price,
they had around 3 million of new
subscribers in 3 months. But after they
increased their price to $8.99, they only
have 1.3 million for the next 3 months.

• Elasticity of demand for Netflix, which is
-8.15. This shows that Netflix is very
elastic and highly sensitive to the
change in price.

• After Netflix increase their price from
$8.99 to $9.99, their quantity of
subscribers will decrease significantly.

ELASTICITY OF DEMAND

• Subscription Video on Demand (SVoD), however, is a very
elastic product. As the price of the subscription increased,
demand has decreased as more consumers “cancel the
subscription plan.”

• Substitutions like iflix, Astro Go and other streaming services
have made the internet-based subscription services elastic.

CROSS-PRICE ELASTICITY
OF DEMAND

Presented by:
NUR ALIYAH BINTI AZIZI

CROSS-PRICE ELASTICITY OF DEMAND

• Cross elasticity of demand measures how responsive the
demand of a product/service is when the price for another
product/service changes.

• Cross price elasticity allows businesses to price their
products/services competitively , plan for risks, and map their
market.

• Formula of CPED = % change in quantity demanded for Product A

% change Product B’s price

CROSS-PRICE ELASTICITIES OF DEMAND
RELATIONSHIP

A relationship is When its Which means that
described as value is
The smallest possible increase in the price of one good
Close substitutes Large causes an infinitely large increase in the quantity
demanded of the other good
Substitutes Positive
If the price of one good increases, the quantity demanded
Unrelated goods Zero of the other good also increases

Complements Negative If the price of one good increases, the quantity demanded
of other good remains the same

If the price of one good increases, the quantity demanded
of other good decreases

In US, it can be evidenced that
Netflix has positive cross-price
elasticity of demand because
Netflix and other SVoD provider

are substitutes service.
It means if the price of Netflix

increases, the quantity
demanded of the its rivals

package also increases.

NETFLIX in USA

When the price of Netflix package
plan increases, the quantity

demanded on its rivals subscription
package also increases.

NETFLIX in USA

There was an increase in the number of close, but not perfect, substitutes
to Netflix. Yet, Netflix still becoming the most popular choice.

INCOME ELASTICITY OF
DEMAND

Presented by:
NORSHIMA BINTI SHA’ARI

INCOME ELASTICITY OF DEMAND

• Income Elasticity of Demand measures the responsiveness of
quantity demanded for a particular goods or services to a change in
income of the people demanding the goods.

• It also defined as the ratio of the percentage change in quantity
demanded of a product to percentage change in the income level.

• The reason to compute income elasticity is to identify the type of
goods being demanded given that there is a change in quantity.

• Income Elasticity of Demand will vary within a product range.
• As a society becomes richer, there are changes in tastes and

preferences.

INCOME ELASTICITY OF DEMAND

Examples of different types of good:
1. Normal goods – demand rises as income rises and vice versa
2. Luxury goods – a bigger percentage increase in demand as income rises
3. Inferior goods – demand falls as income rises and vice versa

Note: a luxury good is also a normal good, but a normal good isn’t
necessarily a luxury good.

INCOME ELASTICITY OF DEMAND

Figure 1 – Normal / Luxury goods Figure 2 – Inferior goods

INCOME ELASTICITY OF DEMAND

ELASTIC GOODS – are seen as LUXURIES or SUPERIOR INELASTIC GOODS – are seen as NORMAL or NECESSITIES

Figure 1 Figure 2

INCOME ELASTICITY OF DEMAND

• Netflix is a service that could be considered a luxury nor a necessity
due to a higher elasticity of demand.

• This may not be the case in the future as many people are
beginning to use Netflix as their primary entertainment source.

• As time goes on, it is expected that consumers will change their
spending habits to completely move away from cable and move
directly to streaming services which would increase the elasticity of
Netflix.

INCOME ELASTICITY OF DEMAND

• According to Michael Wessel, the target market for Netflix’s service
is one that is quite specific.

• In regards to demographics, Netflix targets both males and females
between the ages of 17-60.

• Netflix’s products are targeted towards the lower-middle class and
up, specifically targeted to people (or households) with income
levels of $30,000 and up.

INCOME ELASTICITY OF DEMAND

• In terms of psychographics, Netflix targets 3 basic groups:

• people who are too busy to go out and shop for movies,
• people who are frequent renters and movie buffs,
• people who want to get the most value for their money.

• The behavioral target market focuses on occasions and degree of
loyalty.

INCOME ELASTICITY OF DEMAND

• At the end of 2019, Netflix
subscribers numbered 167.1
million.

• Of these, 61 million accounts
were registered in the US, with
the remaining 106.1 million (63%)
spread over the rest of the globe.

• Netflix has positioned itself to be
a frontrunner in the media
streaming industry.

Source:

INCOME ELASTICITY OF DEMAND

• The average U.S. household spends $2,500 per year on
entertainment, $1,700 on clothing, and $580 on personal care.

• When the cost of movie tickets or moisturizer crawls up another
dollar or so, barely an eyelid is batted.

• But when Netflix wants an extra $ 12 - $ 24 a year (that's $ 0.03 - $
0.06 per day!) for their ever-improving nightlife, customers are
disappointed.

SO, WHAT HAPPEN IF NETFLIX RISE THE PRICE AGAIN??

INCOME ELASTICITY OF DEMAND

This statistic presents data on the share of Netflix subscribers who would keep Netflix if
the price of the service increased in the United States as of December 2018.

Netflix subscribers who would keep Netflix for a higher monthly fee in the U.S. 2018
Published by Amy Watson, Feb 11, 2019

INCOME ELASTICITY OF DEMAND

• The findings show that the majority of respondents said that they
would simply pay the additional fee and continue to use Netflix
regardless of whether the monthly subscription fee rose by one,
three or five U.S. dollars per month.

• However, whilst 84 percent said that they would continue to use

the service in the event of a one dollar price increase, when
respondents were asked what they would do if the monthly price
increased by five dollars, just 53 percent said that they would keep
the service.

INCOME ELASTICITY OF DEMAND

The importance of income
elasticity of demand for Netflix:-
1. Sales forecasting
2. Pricing policy
3. Classification of goods
4. Marketing strategy

ELASTICITY OF SUPPLY

Presented by:
LOOGANESH A/L SHANKUPILLAY

ELASTICITY OF SUPPLY

• If supply is inelastic, it might mean a company is struggling to keep
up with demand because they are short-staffed, need longer lead
time to produce more of their product, or do not have the
resources to expand their facilities.

• If supply is elastic, a company might have a surplus of staff or
labourers available to increase supply.

• Knowing PES allows businesses to determine whether a change in
price with negatively or positively affect the demand for their
product/service.

• Formula of PES = % change of supply

% change in price

ELASTICITY OF SUPPLY

• If supply is inelastic, an increase in price leads to a change in
supply that is less than the increase in price, meaning the PES
is less than one.

• If supply is elastic, the price change yields a larger increase in
supply making the PES greater than one.

ELASTICITY OF SUPPLY

• Netflix dominates the U.S. video-on-demand (VoD) market with 77%
of all VoD services subscribers. With a 21% lead on Amazon, Netflix
has market momentum in the U.S. where the strategy of creating
more original content is paying off with subscriber growth and a
greater variety of content density than their many competitors.

ELASTICITY OF SUPPLY

• The Asia-Pacific subscriber base is
projected to grow at an 18.47% CAGR
through 2023, making it the fastest growing
region globally.

• Western Europe is also forecast to gain
subscribers, increasing by16 million
between 2018 and 2023.

• Latin America, where Netflix is enjoying
success with originally produced content
tphraetdicitsedbetoinggaiwne8ll-rmeicleliiovnedsubgslocbriablelyr,s iins
five years. Sources: Netflix Investor
Relations and Digital TV Research. 77% of
all VoD services subscribers.

• With a 21% lead on Amazon, Netflix has
smtraartkeegtymoofmcerenatutimnginmothree oUr.iSg.inwalhecorenttehnet
is paying off with subscriber growth and a
greater variety of content density than
their many competitors.