Tag: Netflix

The Question Netflix Got Wrong

An interesting email appeared in my inbox Monday morning. It was from Reed Hastings, founder and CEO of Netflix. The subject line, “An Explanation and Some Reflections” got my attention. Was he writing to say that Netflix made a mistake when it implemented separate pricing for its DVD by mail and online streaming services? When I read the first three words of his message I was convinced- “I messed up” suggested Hastings was about to tell us Netflix had a change of heart about its new pricing structure.

Not so fast- he goes on to say “I owe you an explanation.” Hastings proceeds to provide justification for the decision to change the pricing structure. On top of that, he broke the news of Netflix splitting into two businesses, Netflix for online streaming and Qwikster for DVD by mail. Hastings’ message was genuine and the tone was that of someone who realized he had erred in handling the implementation of Netflix’s new business model. But, in the end the message was more of an attempt to save face… and stem the tide of customer defections. Netflix has lost an estimated 1 million subscribers since the change. With more than 20 million customers remaining, we will not shed a tear for Netflix, but the extent of customer defections is significant.

The mistake that Netflix made was that it incorrectly answered a huge question: What would customers do? What would they do after learning that their associations with Netflix of “entertainment delivered as you want it” no longer applied? The changes benefited Netflix only, or at least that was the perception of many subscribers. And, when it comes to brands, perception is reality. I remind my students often that the true owners of a brand are its customers. While a business owns the physical and intellectual property of a brand, its meaning comes from the relationships people form with it. For many subscribers, their relationship with Netflix was shattered when their ability to get entertainment however they wished changed.

I do not fault Netflix for arriving at a decision that changes were needed in its business model to preserve the long-term profitability of the business. But, most everyone (including Netflix management) realizes they damaged brand relationships in the process. So, any change in strategy should be evaluated fully in terms of how customers will react to change? Human nature is to resist change. Marketers must be prepared for the resistance by being able to make a strong case for how change is good for the brand’s real owners.

Managing the Inevitable: Price Increases

We all know about the two things that are inevitable in life: death and taxes. If you operate a business, there is a third inevitability: price increases. Whether it is due to rising costs for transportation, materials, or other expenses thttp://www.blogger.com/img/blank.gified creation of a product or service, passing along price increases to customers is a reality. The decision to raise prices may be rather easy; communicating price increases to customers may not go so smoothly. Just ask Netflix.

Earlier this month, Netflix created a firestorm among its subscribers when it announced that it was unbundling the DVD by mail and online streaming options for receiving movies. Customers who pay $7.99 for mail delivery plus an additional $2 for online streaming will have to pay $7.99 for each plan beginning in September. The 60% price increase for affected customers did not sit well with many of them. The result is not surprising- many customers say they will drop Netflix service rather than be forced to decide if they want to spend $6 a month more for both services. With 25 million subscribers, it will be interesting to see: 1) how many customers follow through and cancel their subscription,and 2) if their departure will have a noticeable impact on Netflix’s profitability.

The problem Netflix created was not that it raised prices, but it did a very poor job of communicating why prices were raised. Do customers deserve an explanation when prices go up? Absolutely! If we are going to talk about being in relationship with customers, part of being in a relationship includes working through rough times such as when prices must rise. In this case, Netflix is dealing with rising costs of home delivery as well as licensing fees paid to movie studios and must stem the tide by changing its pricing models.

When prices must increase, it is imperative that the marketer communicate how the product remains a good value. Otherwise, why should a customer pay more just to help cover costs? Netflix could defuse some of the sting of its price increase by comparing its value proposition (e.g., selection, convenience, and cost) to Blockbuster, Redbox, and other options for movies and entertainment. Never feel that you have to apologize for your price, but make certain that the value offered is never in doubt.

Netflix Strives to be a Step Ahead of Obsolescence

Netflix has been able to enjoy a performance that is counter to the trend of markets overall. The company’s stock is trading near a 12-month high, and business is good at Netflix with more than 10,000,000 subscribers. Its mail order DVD rental business changed behavior for consuming home entertainment. Now, Netflix is looking to innovate further as video streaming capabilities via the Internet improve.

Netflix plans to offer a monthly rate for customers who download movies exclusively and do not use the mail order service. The plan, to be launched in 2010, builds on a behavior shift of many Netflix users who are downloading movies already. The streaming-only plan is also an acknowledgment that mail order DVD is a business model that will become obsolete at some point. By being at the forefront of video download services, Netflix is striving to insure it is a player in that market.

Netflix CEO Reed Hastings compares the situation with what AOL has encountered in recent years. AOL dominated the dial-up Internet Service Provider market, but when broadband connections became available to a majority of the population it was irrelevant as an ISP. AOL has fought to survive by reinventing itself as a content provider, not a connection point. Netflix has learned from AOL’s downfall, and it is a lesson that all businesses should heed. Change will come, maybe it is driven by technology, maybe it is driven by the economy, or perhaps it is driven by customers. But, change will come. Innovating to anticipate future market demands is a must, just ask AOL.

Link: Bloomberg.com – “Netflix Chief Sees Streaming-Only Pricing by 2010”

Movie Rental Battle Is On!

An intense battle has taken shape in the movie rental category. Blockbuster took command of the movie rental market through its brick and mortar presence throughout the country. The consumer buying process was shaken up when Netflix introduced a rent-by-mail approach. The convenience of having movies show up in the mailbox and more recently the ability to download some movies onto PCs allowed Netflix to grab market share from Blockbuster. The industry leader was starting to look like the industry dinosaur. Blockbuster has fought back. It has rolled out a mail delivery model similar to Netfilx, and this week the company announced the acquistion of Movielink, a firm offers movie download service via PCs.

Blockbuster’s recent moves are a signal that it is refusing to concede the online market for movie rentals. Customers of the two companies should be the winners in this battle, as both companies will likely be aggressive in pricing to lure customers. Also, customer service and product assortment should receive greater emphasis as each company looks to create a competitive advantage over the other. And, don’t count out cable and satellite television providers. They will make a play for customers, too, no doubt touting their advantage of on-demand delivery capability rather than waiting for a DVD to arrive via mail. Link