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Analyzing Pricing Decisions for Netflix and Blockbuster

Analyzing Pricing Decisions for Netflix and Blockbuster
Netflix and its competitors have faced interesting decisions regarding product offerings and pricing. As Netflix pursued offering online movie downloads in 2005, its primary competitor, Blockbuster, revised its product offering in response. In addition, both companies have examined the appropriate pricing schema to remain competitive with their respective product offerings.
Using the spreadsheet handout Netflix and Blockbuster Financial Data, answer the following:

ââ?¬¢ Develop simple cost-volume-profit models for Netflix and Blockbuster.
ââ?¬¢ What is the unit volume break-even level of Netflix?
ââ?¬¢ What is the break-even revenue level of Blockbuster?
ââ?¬¢ How can Netflix and Blockbuster achieve profits equal to 10% of revenues?
ââ?¬¢ How can Blockbuster improve profitability given the CVP model?
ââ?¬¢ What conditions would allow Netflix to increase price, and how would that affect profits?

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1. Develop simple cost-volume-profit models for Netflix and Blockbuster.

See excel attached tab "breakeven" where I assumed that cost of sales and marketing is variable (fairly consistent with regression data) for both Netflix and Blockbuster.

2. What is the unit volume break-even level of Netflix?

351.4303523 or 352 subscriptions

3. What is the break-even revenue level of Blockbuster?

$ 5,372,503

This is about 10 times higher than Netflix! See excel spreadsheet for comparison on breakeven tab.

4. How can ...

Solution Summary

Your tutorial presents a simple breakeven (presumes that cost of sales and marketing are variable and the rest is fixed) for Blockbuster and Netflix. Computations are in Excel (click in cells to see computations). An analysis of sales needed to achieve profits of 10% of sales is shown. The discussion is 189 words and gives an idea of how Blockbuster can improve its CVP and under what conditions Netflix could increase its price. This posting used data from 2001-2006 given in the original posting.

$2.19