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Netflix will proceed to lift costs with confidence as its worth proposition continues to be superior to cable tv

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Reed Hastings, CEO of Netflix, attends the red carpet during the Netflix presentation party at Invernadero del Palacio de Cristal de la Arganzuela on April 4, 2019 in Madrid, Spain.

Juan Naharro Gimenez | Getty Images

Netflix announced on Thursday that it would raise prices for US customers.

Don't be surprised if you read the same story next year and the year after and the year after.

The company's decision to increase its standard plan by $ 1 per month from $ 12.99 to $ 13.99 and its premium plan by $ 2 per month from $ 15.99 to $ 17.99 is an integral part of its long-term strategy from Netflix. Because of this, Netflix has a market valuation of $ 218 billion over the past 12 months with net income of just $ 2.8 billion.

Netflix's last price hike was in January 2019. The video streamer was largely able to avoid significant price hikes as it kept adding subscribers, which gave investors a clear growth story. However, Wall Street expects prices to rise steadily as customer growth slows. At this point in time, investors are hoping Netflix will be an indelible staple in people's homes, much like cable television has been for the past four decades.

Early evidence suggests Netflix is ​​on the right track. Netflix's monthly churn (nearly 2%) is well below that of other streaming services like CBS All Access (soon to be renamed Paramount +) and Starz. This comes from data from Antenna, a measurement and analysis company that tracks buying behavior.

The key to increasing prices without significant cancellation spikes or dissatisfaction is to convince customers that they are still getting great value. Netflix's genius over the past two or three years has been a subtle move away from trying to be HBO towards replacing the whole bundle of cables.

Replace cable, not HBO

"The goal is to become HBO faster than HBO can become us," said Ted Sarandos, Co-CEO of Netflix, in a 2013 GQ interview.

But that's exactly what Netflix didn't do. Netflix has focused on a wide range of offerings including animated children's shows, breezy romantic comedies, Adam Sandler films, reality shows like "Love is Blind", simple documentaries like "Tiger King" and food shows like "The Great British Bakeoff ". "and fun game shows like" The Floor is Lava. "It's hard to picture one of those series on HBO. And of course there are HBO dishes – movies like" Roma, "shows like" The Crown "and" Sex and the. " City "like" Emily in Paris. "The entire suite resembles a bundle of cables.

Ironically, despite Sarando's claim, HBO didn't want to become Netflix until recently. While HBO made the decision in 2015 to go direct to consumers as an a la carte application, HBO boss Richard Plepler focused on premium programming and actively avoided most of the other content. Just recently, after AT&T (and a new group of executives) acquired Time Warner, HBO tried to emulate Netflix with HBO Max.

Netflix's decision to become the Bundle-Lite – with no live events, news, and sports – gives the company an excellent argument to raise prices from a value for money perspective. Netflix's premium service is now $ 17.99 per month. The average cable TV bill is about $ 100 a month, according to LightShed Partners. While there are cheaper digital alternatives, YouTube TV costs $ 64.99 per month. AT&T Now (formerly DirecTV Now) costs either $ 55 or $ 80 per month. Even Sling TV costs $ 30 a month.

In the meantime, the quality of the cable bundle is likely to decline in the years to come as most of the premium content is broadcast on streaming services. This should encourage Netflix to keep raising prices, as not only is it a leader in streaming services (which justifies it as the most expensive offering) but it is also an increasingly attractive alternative to cable.

WATCH: Netflix shares rise after company announces subscription price hike

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Katherine Clark