Google wants to launch a subscription based product like Netflix. How would you price this product?

growth strategy Pricing case study Pricingstrategy
New answer on Apr 30, 2020
8 Answers
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PK asked on Apr 03, 2020
Director of Product at PayPal. Based in SF. Worked at Twitter, Yelp, Salesforce, Houzz in the past.

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Axel
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replied on Apr 03, 2020
Bain Consultant | Interviewer for 3 years at Bain |Passionate about coaching |I will make you a case interview Rockstar

I would look at this angle from three angles:

1. What price do we need to have to be competitive with other market offers (Netflix, Hulu, etc)

2. What value do our customers see in our product and what is their willingness to pay (consumer research driven approach)

3. Cost-based approach (what is the cost of buying the content, operating the platform, and buying CDN capacity, marketing, etc.)

Having previously built a similar product before in my career your pricing decision, in this case, will be very much driven by competitive pressure as pretty much everyone is trying to catch up with Netflix and offer a differentiated product vs them.

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Raj
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updated an answer on Apr 04, 2020
Strategy&| ex-interviewer | 78+ coached |95% success @ MBB, S&, RB, LEK, OW, Big4 [SUCCESS STORIES BELOW]| engineer

A very interesting question, and one I have had direct experience with - having managed a project to develop a market entry and pricing model for a new OTT subscription service for a non-media player.

WHAT DETERMINES PRICING?

  • Willingness to pay - we used extensive market and demographic data, combined with a theoretical WTP curve to determine a price matrix for the product by region
  • Market benchmarks - benchmarks on pricing of competing products in markets

These two were weighed against operating costs, to determine a price level that would generate a sufficient return.

Generally, industry has widely adopted value-based pricing over cost-based pricing. There was confidence in having sufficient data to determine price elasticity to maximise value as opposed to anchoring to costs.

(edited)

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Clara
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replied on Apr 03, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

This is the classical pricing exercise, they are very common and solved all the same.

There are 3 main methodologies for pricing:

  1. Cost based: this gives you the minimal price you can charge if you want to return the investment in X years. It´s the classical break even exercise: dividing all estimated costs into all estimated users for that period.
  2. Benchmark: always needed to look arround and see what others are asking for a similar product. In thi case, super-image competitors would be Amazon Prime Video, etc. This needs to be of couse adjusted, since it´s difficult to find two exact same products.
  3. Willingness-to-pay: given your particular value proposition, how much are clients willing to pay for our product? -this one is very difficult to calculate in real life, but needs to be mentioned in a structure

As you can see, you can extrapolate these to practically any product you can think of.

Hope it helps!

Cheers,

Clara

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Anonymous replied on Apr 04, 2020

Hi

I want to make it clear. The main point of Google move in this area: to take the market from Netflix. So, Google will put the prices below Netflix to generate the trial and repeated rate growth.

As proof of the high probability of this, let us see what Google did with the Stadia service. Google said the Stadia service costs $9.99 per month. That’s less than Netflix’s standard $12.99 monthly subscription and just $1 more than its basic service

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Daniel
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replied on Apr 03, 2020
McKinsey / ex-Interviewer at McKinsey / I will coach you to rock those interviews

I agree with Vlad, Piyush – try to force yourself to answer first and then share your answer. This way you will get more out of the exercise vs just asking the question.

Best,

Daniel

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Vlad
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replied on Apr 03, 2020
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It would be great if you provide your ideas first and the experts here would help you with assessing them

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Antonello
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replied on Apr 30, 2020
McKinsey | MBA professor for consulting interviews

Hi, I would consider all the 3 classical approaches of pricing strategies, discussing about pros and cons related to the company, the product, the competitor and the synergies with all the existing products.

Best,
Antonello

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Luca
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replied on Apr 03, 2020
BCG |NASA |20+ interviews with 100% success rate| 120+ students coached |GMAT expert 780/800 score

Hello,

This is a quite standard pricing case, and there are different pricing strategies that you can follow:

  1. Cost based - Starting from the production and distribution cost, taht is usually the lower limit of your price range
  2. Revenue based - Starting from the revenues targets that you could have, considering also the customers willingness to pay
  3. Competition based - Starting from the analysis of the competitive landscape, analysing the actual market price and the potential competitive response

The final strategy can be a mix of the mentioned, don't forget the price differentiation strategy thatcan be important in many cases (e.g. Why don't you create 3/4 different subscription package addressing the needs of different customers clusters?)

Hope it helps,
Luca

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Axel gave the best answer

Axel

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Bain Consultant | Interviewer for 3 years at Bain |Passionate about coaching |I will make you a case interview Rockstar
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