The Netflix Debacle and Lessons for You

October 12, 2011 The Netflix Debacle and Lessons for You

If you’ve looked the news lately, you’ve seen Netflix in it. The super-successful DVD-rental and online video streaming service had been growing like gangbusters over the past few years, reaching over 100 million subscribers.

A few months ago, they announced two big changes – 1) they were increasing their prices by 60% and 2) they were splitting off the the DVD-rental business into a new company called Qwikster. That meant that customers who were used to having one account and paying $10/mo for both delivery and streaming service would now have two separate logins as well as paying $16/mo for the privilege.

As you can imagine, customer revolted. They left in droves and Netflix saw over 4 million customers disappear almost overnight.

In a panic, the company reversed its decision to start Qwikster, hoping to stop the bleeding. It didn’t work… customers are still leaving. Instead of adding 600,000 as they anticipated this quarter, they expect to lose 400,000.

So what are the lesssons for you in this mess? I think there are several:

Change is good, whiplash is bad – simply put, Netflix tried to change too quickly. They took a sharp right turn and gave their customers whiplash in the process. They raised prices too quickly and they forced clients to change their behavior (two accounts) all at once. Had they done either but not both, I think the fallout would have been much lower.

Simplify, don’t complicate – one of the things customers loved about Netflix was the fact that with one account they could order DVDs or watch online. By splitting the two services, Netflix added complexity to the customer interaction, giving customers a reason to look elsewhere for something simpler.

Most often gone, is gone for good – it is difficult and expense to add new customers. When do something to make them, in most cases you’ll never get them back. Making a change that angers some die-hard customers won’t usually drive them away. Many will forgive you and stay.  But when you anger the complacent or the mildly dissatisfied, they will typically leave for good. And, for most businesses, the majority of their customers are complacent or mildly dissatisfied already.

Price points matter – there is a whole field of marketing devoted to pricing strategy. Perhaps Netflix should have read the book on it. There is a bit psychological difference between $9.99, the old price, and $15.98, the new price. It is the difference between under $10 and over. Had they even gone to $14.98 instead, I don’t think the backlash would have been as bad. Under $15 is much better than over. In the mind, most people see $15.98 as closer to $20 than to $15 so that 60% price hike seems even more offensive. In reality, Netflix should have increased prices more slowly over time, inching up a dollar with each hike over time. Now their customers are so price-sensitive, they won’t be able to raise prices again for a long, long time.

As you are doing your planning for the coming year (yes it is time to start), think about the changes you’re making to your business and how they might impact your customers. Raise rates, but slowly. Add new services, but not huge ones. Take away anything that complicates your customers buying and usage habits.

I know I have learned from this example and you’ll be seeing some interesting changes from Dancing Elephants in 2012. We eliminate a lot of clutter and waste for you, simplifying our offerings, cleaning up our website, streamlining our newsletter and basically making it much, much easier for you to do business with us. I hope you’ll stick with us and enjoy the simplicity!

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