Web Business Lessons from the Netflix Debacle
While there’s no doubt that the current predicament facing Netflix embodies the idea of being “stuck between a rock and a hard place”, the way the company has handled its recent move to split off its streaming services from its mail-order DVD rental service has resulted in lost customers and tanking stock prices. So how could the company have handled its decision differently, and what lessons can we take from this debacle to apply to our own web businesses?
First of all, a little background information… Since its inception, Netflix has offered both its streaming service and its mailed DVD service under one package, with different pricing tiers based on usage. For example, customers on the lowest priced plans could request a limited number of DVDs at any time, but still access Netflix’s entire streaming library. As the tiers increased in price, additional DVDs were available for rent at any given time.
But on July 12, 2011, the company announced that it would be splitting these popular services into two separate companies and that customers who wished to retain both streaming service and DVD rentals would be required to pay two monthly subscription fees. This move effectively increased the price of the lowest tier of service by 60%, rising from $9.99/month for the lowest priced unlimited-DVD plan at Netflix to $15.98/month to utilize both services.
As expected, the public reaction to the announcement – which occurred via email and letters mailed to subscribers’ homes – was anything but positive. Customers turned to the web and promised to leave when the company implemented its new pricing policy in September 2011. What was most surprising was that these customers actually followed through, leaving the company in droves. According to an article on the Huffington Post:
“Netflix, in a note to investors, has said that they are set to lose about one million more subscribers than they thought they would following the big price change of July 2011.”
In addition, the company shared the following charts with its stakeholders in a letter dated September 15th, 2011, outlining their initial subscriber expectations post-price increase, compared with their current projections:
As a result of these botched projections and what is widely seen as an ill-advised business move, Netflix stock prices are tanking, falling to a low price of $115/share, as illustrated in the following chart from the Wall Street Journal:
Now, how Netflix (and the newly-launched Quikster DVD rental service) will perform post-split is anyone’s guess. There are certainly arguments both for the split as a necessary business move to avoid the eventual irrelevancy of the physical DVD market as well as against Netflix’s atrocious handling of its price increase from a PR standpoint.
Yes, the company is facing challenges. Competitors like Redbox or Hulu’s paid streaming service – neither of which were major players when Netflix first launched – offer consumers additional choices for media consumption, expanding a field that Neflix once dominated. Netflix is also facing pressure from both TV and movie studios, which could dramatically increase their licensing fees as soon as their current contracts expire.
Not that any of this will necessarily cause Neflix to collapse, as revenues will increase even if the company’s projected subscriber losses hold true, thanks to the dramatic change in minimum prices. And it’s especially hard to say that a company with 24 million active subscribers is in danger of going out of business any time soon…
However, there’s no doubt that the company’s strategy of notifying customers about upcoming changes failed overall, and may have resulted in incalculable damage to the Netflix brand in a marketplace where it’s already meeting substantial challenges.
In the eyes of most consumers, Netflix’s biggest misstep was not justifying the increase in costs with a demonstrable improvement in its services. Concerns about the quality of the Netflix streaming library have been growing increasingly louder over the past year or two, and the recent loss of Starz Network programming only amplifies this sentiment.
From a business standpoint, there’s nothing wrong with increasing prices – in fact, this is frequently a necessity in order to survive in changing markets. However, as an online business owner, it’s important to follow a few basic guidelines when upping prices:
- Clearly state the rationale for a price increase. Most consumers understand that there are factors outside of a business’s control that can lead to higher prices. If Netflix had said something as simple as, “We are increasing this fee in order to bring you a better selection of higher-quality programs” (and then followed through on that, of course), there’s a good chance that much of this mess could have been avoided.
- Ensure the implications of a price increase are understood. After the fallout from its price increase, Netflix customers were hit with another whammy – post-split, the company’s streaming service and DVD rental option would be completely separated, requiring updates to billing information, queues or user reviews to be posted to both sites. And while separating the companies now may make sense if Netflix eventually plans to drop its DVD service, the reasons behind this move were never fully explained to consumers, resulting in frustration.
- Offer empathy. Netflix CEO Reed Hastings royally screwed up with not just one, but two separate messages to customers with a decidedly, “take it or leave it” tone. I’ll keep this lesson simple. If you want customers to understand and go along with your price increases, do your absolute best to acknowledge that paying higher prices will require a sacrifice for some people. If you want them to leave your service as quickly as possible, offer no explanation for your changes and then follow up months later with a rebranding announcement disguised as an apology.
While it’s still too soon to say if Netflix’s handling of its price increases will result in enough lost subscribers to do significant harm to the company, it’s unlikely that the majority of Netflix customers will jump ship right away, as there’s no true alternative to the size and scope of Neflix’s service. As Forbes points out:
“It is true that many subscribers are unhappy with recent service restructuring and pricing changes, but where are they going to go? The other competitors are there but haven’t gained scale yet.”
If you’re a small business owner studying the lessons of the Netflix price increase in order to determine how to raise your own rates, you likely don’t have this advantage. Even if your business is unique enough not to face significant competition, it’s hard to imagine that most of you are in the position to lose over a million customers overnight without seeing a negative impact.
So instead of following Netflix’s bull-headed approach to forcing through major structural changes and price increases, take the time to think about how your customers will react to higher rates and prepare to meet their objections ahead of time. Be truthful, be honest and be upfront about the changes that you’re making, and you’ll be rewarded with both customer loyalty and increased revenue.
Image: alforque
