• The streaming giant says the service will be an "addition" to its existing plans, which do not include adverts.
• Last month, co-chief executive Ted Sarandos said the company was in talks with other businesses to find ways to appeal to price-sensitive audiences.
Netflix has teamed up with Microsoft to offer a cheaper subscription plan to customers that will show adverts.
The streaming giant says the service will be an "addition" to its existing plans, which do not include adverts.
In April, shares in Netflix slumped after it reported its first subscriber loss in more than a decade.
Last month, co-chief executive Ted Sarandos said the company was in talks with other businesses to find ways to appeal to price-sensitive audiences.
On Thursday, Netflix said it had selected Microsoft as its global advertising technology and sales partner to introduce a "lower priced ad-supported subscription plan".
"Microsoft has the proven ability to support all our advertising needs as we work together to build a new ad-supported offering," Netflix's chief operating officer Greg Peters said in a statement.
"More importantly, Microsoft offered the flexibility to innovate over time on both the technology and sales side, as well as strong privacy protections for our members," he added.
Mikhail Parakhin, the president for web experiences at Microsoft, said customers will soon have "more options to access Netflix's award-winning content".
"Marketers looking to Microsoft for their advertising needs will have access to the Netflix audience and premium connected TV inventory. All ads served on Netflix will be exclusively available through the Microsoft platform," he said.
Netflix is trying to renegotiate the deals it has with major entertainment firms so that it can show adverts as part of its service, the Wall Street Journal reported on Tuesday.
The firm has reportedly held discussions with Warner Bros., Universal and Sony Pictures Television.
Warner Bros declined to comment when approached by the BBC on Wednesday. Universal and Sony did not immediately respond to a BBC request for comment.
In April, the company's shares slumped by more than a third after it revealed a sharp drop in subscribers and warned that millions more were set to quit the streaming service.
The sell-off wiped more than $50bn off Netflix's stock market value and experts warned that it would face a struggle to get back on track.
Last month, the firm announced 300 job cuts as it grappled with the drop in customer numbers.
Also last month, Mr Sarandos said Netflix was in talks with several companies to explore advertising partnerships.
"We're not adding ads to Netflix as you know it today. We're adding an ad tier for folks who say 'Hey, I want a lower price and I'll watch ads'," Mr Sarandos told an audience at a conference in Cannes.