The Netflix Lesson: When Plans Meet Reality
Thursday, 13 October 2011 00:00
Marketing and technology companies are obsessed with the “next big thing.” As the pressure to grow users increases, some executives forget what made them successful in the first place. There’s no better lesson than the recent Netflix debacle, which is a classic example of “forgetting who brought you to the dance,” as the saying goes. It’s the 21st century “New Coke.”
To recap: The problems began in July, when Netflix tried to position a price hike as a customer benefit. They would offer, instead of the $9.99 unlimited streaming and unlimited DVD-by-mail service, an unlimited DVDs or unlimited streaming services for $7.99 each. This was, effectively, more than 60-percent increase. To further rub salt in the wound, the DVD-by-mail service would be called “Qwikster.com,” requiring a separate login, queue, and credit-card charge. More expensive and less convenient, Qwikster was a losing proposition from the onset. Thousands of consumers abandoned Netflix, in favor of Redbox and the resurgent Blockbuster.
Fast forward to this week, where Netflix management announced it will not rename its DVD-by-mail service and its U.S. members will continue to go to the Netflix website for both unlimited streaming and unlimited DVDs. (The price increase, though, remains in effect.) Instead, U.S. members will continue to use one website, one account and one password for their movie and TV watching under the Netflix brand.
“Consumers value the simplicity Netflix has always offered and we respect that,” says Reed Hastings, Netflix co-founder and CEO. “There is a difference between moving quickly — which Netflix has done very well for years — and moving too fast, which is what we did in this case.”
In September, Hastings explained it this way, on the Netflix blog: “For the past five years, my greatest fear at Netflix has been that we wouldn't make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.”
Here, Hastings is wrong. A company can be moving to fast for customers, especially if they lose sight of the value proposition. In marketing, most services can be boiled down to one or two major value propositions. For Netflix, it wasn’t about movies, it was convenience and value. Movies are price-sensitive commodity, with different customers for each step in the value chain. Some enthusiasts have to see first-run films at top-dollar theatres, while others scan the 2 for $20 DVD bin. What Netflix management lost sight of was where they fit. Pricing power only works when there is some level of exclusivity, either in functionality or product selection. Video entertainment is not in that category.
The key to keep in mind is, the move to all-digital streaming was probably in Netflix’ plan all along. It’s clear the market for by-mail DVD delivery is eroding, both by greater on-demand video options (Facebook, Amazon, cable operators, etc.) and by cheap kiosks like Redbox. Timing and value are everything in the entertainment business, and the lesson is to listen more closely to customers, outside economic factors and to modify plans as needed to accommodate them.
