The Real Reason Netflix Just Raised Prices. It's Not What You Might Think.

Late last week, and without much fanfare, your Netflix (NASDAQ: NFLX) subscription just got a bit pricier. The streaming pioneer simply updated the prices on its website and began sending out email notifications to U.S. users reflecting the new, higher monthly subscription fee.

Customers are all too familiar with Netflix's annual price increases, which typically come as regularly as clockwork. When asked about the reasoning behind its monthly price hike, the streamer responded with the same boilerplate language we've heard in previous years.

But the motivation behind this year's increase might be a little different.

Image source: Netflix.

Show me the money

The most obvious reason for Netflix to raise prices is its time-honored strategy of fueling its "virtuous cycle." In its simplest form, Netflix adds content to its large and growing library, attracts new subscribers, and uses the proceeds from its monthly fees to add more content, which attracts more subscribers. This flywheel has been employed successfully by Netflix since the beginning, so there's no reason for the company to change gears now.

Indeed, when asked for the rationale behind the price increase, Netflix used the same language it has used for years:

Our approach remains the same: We continue offering a range of prices and plans to meet a variety of needs, and as we deliver more value to our members we are updating our prices to enable us to reinvest in quality entertainment and improve their experience by updating our prices.

Not to put too fine a point on it, but Netflix also does it for the profits. The company has been able to gradually increase its bottom line, which also comes as regular as clockwork.

Yet beyond the obvious, there's another strategic reason that might be behind Netflix's recent move.

One of these things is not like the other

The new pricing took effect on March 26, and the increase was predictable, as Netflix has historically increased its price by a dollar or two:

• Standard plan (no ads/two devices): $19.99, up $2 from $17.99
• Ad-supported plan: $8.99, up $1 from $7.99
• Premier plan (no ads/four devices): $26.99, up $2 from $24.99
• Extra member fee (outside the household, w/o ads): $9.99, up from $7.99
• Extra member fee (outside the household, with ads): $7.99, up from $6.99

The obvious disparity here is that plans without ads went up by $2 per month, while ad-supported viewing tiers went up by just a buck.

It's likely no coincidence that Netflix has been leaning into its recent advertising success. In the company's fourth-quarter letter to shareholders, Netflix noted that "Ad revenue rose more than 2.5x to over $1.5 billion" in 2025. During the earnings call, co-CEO Spencer Neumann noted that the company expected advertising to drive meaningful growth and planned to roughly double its ad revenue to about $3 billion in 2026.

Despite the impressive growth of Netflix's ad-supported tier, it still lags average revenue per member (ARM) for the standard plan without ads. Neumann said that "represents an opportunity for us. So as we improve our ad capabilities, we can close that gap over time. We can drive more revenue."

The price hikes, while increasing revenue for additional content and higher profits, also serve another strategic purpose. The ad-supported tier, which increased by just $1, is the odd one out. The more subscribers Netflix has watching its advertising, the more valuable it becomes to marketers. The company can then charge advertisers more for the ads it shows, increasing the ARM for its ad-supported tier and boosting its bottom line.

This shows why Netflix has a vested interest in attracting subscribers to its ad-supported tier, as those subs could one day be more valuable than those who pay for ad-free viewing.

Dissension in the ranks

It seems there's an internet revolt every time Netflix raises prices, and this time was no different. Some dissatisfied customers took to the ether, vowing to cancel their memberships -- also as regular as clockwork. However, history has shown that these folks are typically the vocal minority, and the price increase more than makes up for the few subscribers who actually do cancel.

Furthermore, despite its latest price increase, Netflix's monthly subscription cost is comparable to its major competitors, according to analysis performed by Variety.

Netflix is currently selling for 38 times earnings, which is certainly a premium, but that's well below the stock's average multiple of 45 over the past three years. Shareholders who bought during that period haven't been disappointed. Netflix stock is up 184%, more than three times the 60% gains of the S&P 500.

That's why Netflix stock is a buy.

Danny Vena, CPA has positions in Netflix. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.