Netflix says it will boost the price of ad-free viewing when the actors’ strike is settled. Why is the basic ad-supported plan exempt from the increase? Because the company makes as much as $5 more per month from people watching ads.
Netflix plans to increase the price of ad-free viewing
The news that Netflix will be increasing the price of ad-free viewing again soon will likely frustrate many subscribers who enjoy viewing unsullied by interruptions. Subscribers already pay the highest premium in the business for an ad-free experience. Since the $9.99 monthly ad-free tier was eliminated, the premium to watch without ads for new subscribers has risen to $8.50 monthly. The premium is lower at Max ($5 extra) and Paramount+ ($6 extra.) 
Another couple of dollars to continue to watch without ads will probably make many subscribers look again at the ad-supported plan.
New data from eMarketer seems to explain why Netflix is so keen to get its subscribers to watch ads. The company just provided estimates of what ads on each of the top SVOD services cost. In Q3 2023, Netflix sold its ad slots for an average of $49.50 per thousand views (CPM.[i]) Disney+ was slightly behind at $46.11, and Peacock and Hulu were lower at $38.40 and 23.62, respectively.
Over time, eMarketer sees the cost of advertising on these four SVODs converging toward a similar value, likely around $25 or $30 CPMs. Netflix CPMs have declined a lot since the service introduced an ad tier. The company asked for nearly $60 at the end of 2022, and eMarketer expects the downward trend to continue.
For now, at least, Netflix is commanding a very attractive premium for ads on its service. We can use eMarketers CPM number to estimate how much ad-supported viewers could contribute by watching ads.
The incremental value of an ad-supported subscriber
Netflix’s ad load is among the lowest in the industry, with just 4 minutes per hour. Assuming an average ad length of 30 seconds means the average viewer will only see about eight ads per hour. On traditional TV, the average viewer sees between 25 and 30 ads per hour. Comscore says the average Netflix household watches a market-leading 35 hours per month, three or four times as much as MAX and Disney+. If ad-supported viewers watch this much, they will see 280 ads each month.
With an average ad CPM of $49.50, an ad-supported Netflix viewer is likely generating about $14 per month in ad revenue. Remember that the premium for watching Netflix ad-free is currently $8.50 monthly.
Will Netflix boost its ad-free plan cost to $21 a month?
Currently, Netflix charges $15.49 monthly for its cheapest ad-free Standard plan. The calculations above suggest that if it wants to equalize the revenue between ad-loaded and ad-free viewers, it should charge $21 monthly. Presumably, it would also raise the price of the premium plan to $26 a month. So, what will it do when it implements the price increase later this year? Probably not.
A $6-a-month increase (35%) would undoubtedly be too much for many subscribers. Netflix has asked its members to put up with a lot this year. The adjustments people had to make to deal with password-sharing were difficult, and many members ended up paying $8 a month extra to cover another household. Another big price increase would undoubtedly result in a large group of until-now loyal customers reevaluating the value of the service.
There is also a lot of variability in the ad market that is absent from subscriptions. My calculations above assume a 100% fill rate; that is, every ad slot Netflix has for sale is bought. Fill rates are rarely 100% and often far below it. Ad markets can crash, with values plummeting 50% or more. It could also be that Netflix CPMs trend toward the average of $30, in which case the ad revenue earned per basic tier subscriber is $8.50 a month, the same as the premium for ad-free viewing today.
For these reasons, expect Netflix to add $2 a month to the Standard and Premium services tiers when it eventually implements the increase.
[i] CPM – cost per mille
