Netflix: Lessons For All of Us

By Al Brisard

On Oct. 25, The Wall Street Journal declared that “Netflix, Inc., which once could do little wrong in the eyes of customers and investors, has lost the goodwill of both."

Background

This past July Netflix upped the price for its combined streaming and DVD mail services from $10/month to $16/month, catching a large segment of its subscribers off guard, and, as admitted by Reed Hastings, Netflix CEO, providing an inadequate explanation for this 60 percent increase in cost. In September the company stated its intention to spin off the streaming services from the DVD mail service, renaming the mail service Qwikster. A dilemma for many subscribers was clear: two monthly charges instead of one and access to two sites with two passwords instead of one for both formats – for a 60 percent increase in cost.

The change would mean that a subscriber’s combined database of rated streaming and DVD choices was also broken into two databases. The result: Netflix program recommendations no longer would be made based on the subscriber’s previous combined mail and streaming choices.

Subscriber anger was sudden and widespread. Qwikster lasted a total of three weeks. The DVD mail service was moved back under the Netflix brand. On October 10, Hastings stated in a Netflix Blog sent to all subscribers, “This means no change: one website, one account, one password ... in other words, no Qwikster." However, Hastings did not rescind the price increase, maintaining that the July price change was necessary due to costs to license additional streaming material.

On October 24, Netflix reported that a whopping 800,000 subscribers had cancelled their services and that third-quarter earnings and revenue rose, but below Wall Street’s expectations. The company projected that subscriptions for DVD delivery were declining sharply while streaming subscribers would remain flat in November and they would lose money in the near term due to expansion into the U.K. and Irish markets. Netflix stock plummeted in after-hours trading that day, and the company’s market value reached a low of about $4.6 billion, down from a high of over $16 billion three months earlier.

Netflix made what appears to be several basic mistakes over a very short period of time. But they are not unique, and it’s worth taking a look at what lessons service providers, and indeed all of us, can learn from Netflix.

Proactively Work to Retain Customers

First and foremost, keep your eye on your customer base, and every time you consider revising programs and pricing, consider the implications for your valued customers. Think through what changes might mean to them – even changes to only a portion of your total services. Are there alternatives out in the market that your customers might switch to? Keep in mind that if you lose part of a customer’s business to a competitor, chances are the customer will consider other offerings from your competitor and you could wind up losing a valued customer entirely.

Retaining customers means keeping them happy with your services. Once you acquire a customer, do you just expect that they are going to pay their bill and you never really take them into consideration as you look at new things? If your customers qualify for one of your new plans that would provide them with more cable channels or greater bandwidth for the same or lower price, you need to proactively reach out and offer them the better plan, or, better still, just give it to them. The loyalty your customers would have to your brand would be huge. It would be a clear sign that you value them and they will positively impact your brand and you will get new customers because of it. Also remember, creating disloyalty can cause the opposite effect which is often more likely and stronger.

It appears that Netflix took its subscribers for granted, and felt it could do whatever it wanted to do and it would continue to retain and increase its subscriber base. The company apparently overlooked the very things that brought it customers in the first place and also overlooked the fact that it is easier and more cost effective to “farm" its existing customer base rather than acquire new customers.

Communicate

It’s probably true that price increases were needed for Netflix to grow its business. But it failed to properly communicate the changes it was in the process of making. In some cases, subscribers only recall learning of the price changes when they received their monthly bank statements. And when a communiqué was sent out, the company simply stated that “the July price change was necessary, we are now done with price changes (sic)," leaving subscribers with little or no options; a “take it or leave it" approach, and 800,000 subscribers left it!

All of us need to maintain a dialogue with our subscribers, and it’s not enough to contact them only when new, exciting products and services are available. Subscribers need to be told in advance about an upcoming price increase or the curtailment of a service. Give them adequate time to adjust to change.

Do Your Homework

Netflix is a company grounded in database analysis and strategic planning, but it looks like it chose to ignore the more subjective side of its business – what were the less rational reasons subscribers flocked to the service and remained fiercely loyal to it. It seems as if Netflix assumed to know its subscriber market better than they did. A New York Times article says, “Mr. Hastings said he was not sure whether the plan to split the company had been presented to customer focus groups before it was made public. Mr. Hastings said he assumed it had been. But he said he did not recall what those focus groups had said about the plan."

And maybe Netflix actually wanted to force its DVD clients to streaming-only, which is a lower cost model. But did they really do enough research and predicative analysis to properly gauge the impact? The results would indicate no. Hubris played a big role in the errors, CEO Hastings said.

In spite of the wealth of data collected from your subscribers over the years, don’t assume you fully understand your customer base and don’t rely solely upon quantitative analysis. Always try and learn more about your customers, especially in the current period of rapid changes in technology and services. How receptive are they to change? What is needed to move them over to new services without causing customer churn?

At the end of the day, it is far less expensive to retain a customer than to acquire one. This truth has been self-evident as long as sales and marketing have been around. Companies, especially those in rapidly changing markets such as telecommunications, often ignore that truth and overlook the basics of customer retention – that is until they lose the loyalty and ultimately the revenue from large segments of their customer base. They then learn, albeit a little too late, that hubris has no place in business.

Al Brisard is vice president of marketing and business development at Vertek Corp. , a leading provider of end-to-end business process outsourcing, business consulting and managed business assurance offerings that allow communication providers to reduce costs, improve customer experiences, grow revenue and ultimately improve profitability. Contact him at: abrisard@vertek.com.