Sirius Shows How to Play a Price Hike Without Getting the Blues

Sirius Radio
Sirius Radio

Sirius XM Radio (SIRI) is the latest company to raise its prices and totally get away with it.

The satellite radio service provider posted better-than-expected subscriber growth in its latest quarter, despite increasing its monthly rate by 12% in January.

Sirius XM added 405,000 more subscribers than those that canceled during the first three months of the year. While 65% of its existing self-pay customers are still paying the original $12.95 monthly rate, anyone joining this year gets the new rate of $14.49 a month.

Followers of the media giant should be encouraged by the quarterly report it released Tuesday morning. Churn and the conversion rate of new-car buyers turning into paying customers after their free trials run out are holding up just fine. There was no bump in either metric despite the increase.

The shocking nugget in all of this is that most will argue that the price hike wasn't necessary. Programming and content costs at Sirius XM have actually been declining. Sirius XM is raising rates simply because it can -- and the public is OK with that.

Knowing How Much Is Too Much

It was an entirely different scene at Netflix (NFLX) last summer. The video-service giant chose to begin charging separately for its streaming service while knocking $2 off a month on its DVD-based plans. The result of the blended pricing strategy was that while non-streaming customers would be paying less, some customers would pay as much as 60% more for the service.

Netflix could point to escalating streaming costs to justify the move -- unlike Sirius XM and its declining content costs -- but the public didn't see it that way. Netflix suffered a big hit during its summer quarter. Now, streaming accounts are growing again, though Netflix shed millions of its disc-based customers.

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Sirius XM isn't the only consumer-facing company to raise its prices lately. Netflix rival Redbox -- owned by the coin counters at Coinstar (CSTR) -- rolled out a 20% increase on DVD rentals. The daily rate went from $1 to $1.20.

How are things going for Redbox? Well, it raised its revenue guidance a few weeks ago. Customers obviously aren't flinching, even though Netflix's competing disc-based service is cheaper than it was a year ago.

Likewise, Costco (COST) didn't face a lot of resistance when it increased its annual membership rate by 10% last year. The move probably wasn't necessary. Costco can always pass on rising costs through the warehouse club's merchandise. However, bargain-seeking shoppers looking to buy their groceries in bulk stuck around.

An improving economy obviously helps. Sirius XM, Redbox, and Costco probably wouldn't have been able to get away with these moves if we were falling back into another recession. However, it's also important to keep the increases modest -- as all three companies have done -- and to communicate the moves effectively.

If your service or product is worth more than what folks are currently paying, reasonable increases are apparently acceptable. If it doesn't play out that way, then maybe the service or product wasn't as valuable or as in demand as you imagined.

Longtime Motley Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services have recommended buying shares of Netflix and Costco Wholesale.