Netflix pricing and subscription cost analysis

Accounting

Netflix Costs

Netflix is a well-known media company. The firm makes media content available to customers based on a monthly subscription fee. The main area of the business is the internet television network, with the company streaming media content such as television programs and films, to more than 44 million subscribers across more than 40 counties (Netflix, 2013). In addition the firm also has a DVD rental segment, sending out DVD's by post. This model of operation places the firm in the service sector; the service offered being the media distribution. The firm is divided into three segments; the postal rental business in the U.S., the domestic internet streaming business in the U.S. And the international streaming business.

The firm has an inventory; there is a physical inventory of the DVD that is sent out for the postal rental service. The digital content library is not a physical inventory, but they make up the services that are accessed by the customers and are classified mainly as a current asset.

Expenses

In order to operate ad offer the services to the customers, Netflix will incur expenses. These may be categorized as variable costs and fixed costs. Variable costs are those which vary depending on the level of output, fixed costs are those which remain the same regardless of the level of output.

The Netflix accounts give some indication of the type of costs that are incurred for the variable and the fixed costs. The variable costs include the cost of sending out the postal DVD's, as for each item sent costs will be incurred, including postage and the packaging costs. It is noted that an increase in postal costs could have an adverse effect on the business. These costs are impacting only ion the postal service segment of the firm. There are some other variable costs, the provision of the call centers/service centers may have a high level of fixed costs, but the more customers the firm has and the more calls the customer service team deal with, the more staff they will need; so the staffing is a variable cost. Payment processing fees are also likely to be variable, based on the level of payments that are received.

Many service firms will have a high level of fixed costs, associated with their costs incurred to provide the service, with the cost the same regardless of the amount of business. Netflix has a number of fixed costs. A major fixed cost is the licenses for the content, which are mainly a fixed level of payment to the content provider regardless of the number of times the content is accessed by the Netflix customers. These agreements are usually multi-year contracts (Netflix, 2013). In 2013 the content was assessed as a cost of $1,706,421 thousand (Netflix, 2013). The content also has to be delivered, so the firm has a significant investment in the use of communications and hardware systems, and the cost of internet access, these costs are generally fixed according to the traditional models of fixed and variable costs. The provision of the support infrastructure, such as the head office and the call centers may be seen as mainly fixed costs.

Other costs which may be considered as material to the firms' performance may be associated with the marketing of the firms' services. These can be varied to the firms' choice and to fit in with the firms' budget for nay period, and are likely to be higher when the firm is launching in a new country. These costs are usually classified as the overhead costs and seen as part of the fixed cost expenditure.

Value Chain