How Netflix Could Have Raised Prices without Completely Ruining Their Credibility
For those of you who aren’t subscribers or have not been following the news surrounding Netflix in recent weeks, the company has announced that they will be drastically raising their prices, and the decision has been met with an understandable amount of ire from within their customer base. Currently (though about to be altered as per the new pricing scheme) Netflix offers several easily comprehended levels of service; 1 Disk at a time through the mail for $9.99 per month, 2 Discs through the mail at a time for $14.99, 3 for $19.99, and 4 for $27.99, all of which offer unlimited online content streaming as part of the subscription price. A streaming only plan was also available for $7.99 per month.
In an overtly direct press release on July 12th, Netflix announced that they would be separating their DVD by mail and streaming content services. A single DVD would drop to $7.99 per month while two at a time would drop to $11.99, and it appears that 3 and 4 discs at a time have been phased out altogether. Additionally, to continue to have access to the company’s streaming services, customers would be required to pay an additional $7.99 per month, meaning that a subscriber who wanted to continue to use both services would have to pay a total of $15.98; a 60% increase from the $9.99 they currently pay.
Ultimately the issue here is not that the company chose to raise prices on the services that they offer, in fact as recently as 2010, they increased the cost of a single DVD by mail by $2. Rather, it’s the method through which they chose to implement the decision and the general lack of appreciation for the customers who have made them what they are today.
To me, the decision to release the statement directly to the media in a press release, foregoing direct contact with their subscribers first, is a mind boggling one. This is a company that, with their customer’s full permission, sends out as many as 3 emails per movie or TV show watched, ensuring that discs were delivered promptly and that the quality of their streaming content was acceptable. It is not much of a reach to imagine a scenario where a carefully worded, mass email was sent out to each and every subscriber before the information was disseminated to the press. Yet it was only after the story was picked up on the news that they sent out a tersely worded email to subscribers notifying them in as few sentences as possible that they would be billed more unless they took direct action to change their accounts
The lack of a well timed notification from the company is staggeringly irresponsible from a brand loyalty perspective, but even more egregious was the message behind the announcement. You can read the full press release here but in essence it made no apologies or coherent rationalizations for the 60% price hike, and instead they did the absolute worst thing they could do; they told their customers what to think, and they did it with a bit of an attitude. In generically explaining why they were raising prices they danced around the notion that their subscribers valued choice and that by separating their two services it allowed them to tailor the service directly to individual preferences. They made it abundantly clear that they, the company, were not making enough money off of their DVD-by-mail service, yet they never once mentioned the reality of the fact that most of their customers want both services and would be subjected to a substantial price hike, or for a moment suggested that the increase in price would benefit the customer in any way. The internet practically imploded with rage.
The reality of the situation is that Netflix absolutely has to raise their prices. As the founder of what is quickly becoming a crowded segment, they had the luxury of structuring several highly lucrative content streaming deals with TV channels and movie studios long before either recognized the value of the service. In 2010 Netflix paid approximately $180M in licensing fees, yet as their 4 and 5 year deals expire and are restructured, it is estimated that their licensing fees in 2011 could top $1.9B. THIS is an acceptable reason to raise prices. Trying to convince your customer base that they wanted more choices at higher costs is not. The company, in the end, was thinking like a company that needs to balance their income and expenses, and for some unknown reason they expected their customers to share that perspective.
Incredibly, Netflix was able to make the situation infinitely worse, as company spokesman Steve Swasey apparently loves the taste of his own feet and keeps continuously shoving them in his mouth. In an interview following the press release he claimed that many customers want the option of streaming-only or DVD-only packages, and said:
“We wouldn’t have charged this when the streaming catalog was still lean. The streaming catalog is robust to the point where a lot of people won’t want DVDs anymore.”
When millions of customers responded with irate messages to the contrary, Swasey went on to say:
“We knew there would be some people who would be upset. To most people, it’s a latte or two.”
Then when the inevitable backlash on THAT message started pouring in he confirmed his absolutely asinine ignorance by releasing a statement that said:
“I made a comment to someone, on background, that the $6 difference between the old and new prices is the equivalent of a couple of cups of latte. And that’s gained a lot of traction. I’ve received a bunch of hate mail, because people thought Netflix was being insensitive to people who don’t drink latte. That’s not the case at all. I’m not a coffee drinker, and my wife drinks regular joe.”
Typically I would attempt to break down such a series of statements into where he went wrong and why, but I am actually at a loss for words, so I will simply say that this man is coming across as a fool of the highest order. First of all I personally take issue with the statement that the streaming catalogue is, to use his words, ‘robust’ because unless you like straight-to-DVD releases, hopelessly low-budget knockoffs of popular films, and obscure documentaries, you will quickly run out of things to watch. Then to insinuate that by cutting back on coffee his customers can continue to afford the service his company is providing is wildly inappropriate and completely misses the point. And finally to respond to that statement with an even more idiotic one is either a very poor attempt at sarcasm or a confirmation that he is in fact the worst PR man on planet earth.
It is my opinion that Netflix customers are not really angry about the price increase. Sure, $6 per month translates to $72 more per year and that is no inconsequential sum, but really they are upset about the cavalier way in which they are being treated. The company is acting as though this cost hike is the natural and expected progression of business, yet their customers are not directly seeing the reason behind any of it and are becoming increasingly annoyed at the disinterested and disconnected way in which their concerns are being (or are not being) responded to. In fact, as if to hammer home their new customer service policies, anyone who reduced their service to the streaming only level received a rather curt email instructing them to return any outstanding discs they may have or face being billed for the missing DVDs.
It is my belief that this entire situation could have been avoided with a little more attention paid to the customer, and that it can actually still be salvaged, despite the fact that Netflix now ranks dead last among the media streaming companies in brand perception, their stock price dropped 10% in 2 weeks, and unsubstantiated reports have surfaced claiming that more than 2 million people have cancelled their subscriptions since the announcement was made.
First of all, we have established that the channel through which the message was released was not right at all. Subscribers deserved to know what was going on before anyone else, and even though the news would have quickly spread to other media sources, it would have given the company a slightly stronger leg to stand on having put their customers first.
Secondly we have established that the message was completely wrong. One of the first rules of branding is that you can lay out all of the facts for consumers, and you can even suggest that they feel a certain way about them, but ultimately you have to let them make a decision for themselves, and Netflix failed miserably at this. In attempting to tell subscribers what they did and did not want, and convince them that this increase came at their own request, they opened themselves up to attack, forgetting that online social networks offer a fairly unrestricted platform for customers to vet such an unlikely claim with each other.
Netflix should have approached the situation by being as transparent as possible, and openly claiming that their commitment to providing customers with the most high-quality streaming content on the net required that they restructure a number of licensing contracts that will unfortunately translate to increased costs to the end user. Within this context it makes perfect sense that the two services (streaming content and DVD by mail) be separated so that anyone who does not wish to use one or the other is not subjected to the price increases associated with it. I am sure that people still would not have been overly happy about the rising costs, but at least they would have understood the reasoning behind them and felt as though they were getting something for their money.
Which brings us to the several things that Netflix COULD have done differently to make this price increase less of a slap in the face to its loyal customers, and they all revolve around the idea of generally being nicer to the user.
Netflix runs a service. Their product is nothing more than the distribution of other people’s products, and when a service stops paying attention to customer service you know they are in for trouble. The key to maintaining a strong service is the continual demonstration of value to the customer. Unlike a product, which is paid for one time and continues to satisfy its intended purpose over and over again, a service must exist in a constant state of positive interaction with the consumer in order to maintain its appeal. Generally speaking, Netflix should have approached the situation from the minds-eye of the consumer, rather than the analytical eye of their accounting department, and I have come up with three simple ways in which they could have helped to make this a reality.
If in fact Netflix had chosen to adjust their message in the previously suggest way, they could have also implemented a gradual price increase as opposed to a one time massive adjustment. I would hazard a guess that despite their ever-growing catalogue of streaming movies and TV shows, and the rising number of users viewing them, any customer satisfaction surveys are still likely to allude to the fact that users want more new releases and popular films available to them. Therefore the existing price increase has very little demonstrable value to the customer, as they will soon be paying a great deal more for the same service that they already weren’t entirely satisfied with. However, if the company had released a message to its customer base saying that the price would be rising $2 every six months for the next year and a half (the same $6 total increase) while the company restructured their licensing deals and began increasing the number of offerings in their streaming catalogue, it is very likely that subscribers would be more than willing to wait it out and see whether the improvements justified the eventually identical price increase.
And yes, you are absolutely right. Even with the 2 Million subscribers (and counting) who have canceled their subscriptions, the company will still make more money over the next 18 months under the new pricing scheme than they would with my proposed graduated one (about $250M more, or about 4% of their totally revenue). But it remains to be seen how much damage is yet to be done to the brand and to the company because of Netflix’s ineptitude, and I don’t imagine that it is a stretch at all to believe that their ‘new-subscriber’ rates will go down dramatically, whereas publicly increasing the services offered under a graduated plan would undoubtedly have attracted new blood.
One of the primary sources of these new customers is through the sale and receipt of gift subscriptions, and the continuation of service once the gift duration has expired. However under the new agreement, all gift subscriptions are being honored for their monetary value, and not for the service level that they were intended to provide. This means that a gift of $120 meant to provide a single DVD at a time and unlimited streaming for an entire year will now last for less than 8 months before the individual who received the gift will have to begin paying for the service themselves. It is my belief that as a show of good faith, all gift subscriptions should have been honored for their intended duration and not for how long they can last before running out of money.
Lastly, the company is taking much too hardline a stance on the battle between their streaming and mail services. Publicly, they seem to believe that their streaming catalogue is on the cusp of replacing their DVD-by-mail business, but privately, they must know that it does not provide anywhere near the same selection. In all fairness, they probably know a lot of things that we, the general public, do not. In fact, they may have several extraordinary deals in the works that will transition every movie they own to their streaming service. But the bottom line is that at present, any such information is being kept behind closed doors and what we, as customers, are left with is a corporate statement that seems quite out of touch with the reality of the situation.
I understand Netflix’s desire to push their streaming services, as they certainly are the future of their business, and they have far lower overhead costs than mailing hundreds of thousands of DVDs per week. But the most important thing for them to keep in mind during what should be a very slow transition, is that the customer experience always has to come first. There are certainly ways for them to highlight their web-based products and showcase the new features and content they are going to have to add to keep it competitive, but to downplay, or worse, devalue, the DVD-based service that meets the majority of their customer’s needs is like a condemnation of anyone who still wants to make use of it. They should continue to take a balanced approach to promoting both services until there is enough of an overlap in content between them that customers can have ultimate freedom of choice in which service they would like to use. Only then will they be able to reduce, and eventually kill off their DVD business without really affecting their customers.
For those of you out there who are holding on to hope that Netflix can to return to its former glory (all 12 of you), take solace in the fact that all is not lost for them quite yet. They have certainly not thought through their actions of the past month, and their PR gaffes may be remembered for quite a while, but they still have the opportunity to save face if they make the choice to admit to their mistakes.
In a world of absolute transparency, it is honesty, more than anything else, that wins customers. We live in a time where nothing can be kept in secrecy, and everything gets out eventually. If you do something wrong, publicly acknowledge how wrong it was and what you intend to do about it. If an unforeseen complication arises, tell the world and then fix it. And if you have to raise prices, be honest about why rather than crafting some innocuous PR line about how you are simply satisfying the needs of your customers. There is an old saying that ‘only the truth will set you free’ but never has it been more relevant in business than right at this moment.
What do you think about Netflix’s recent strategy? Are you a subscriber? Were you a subscriber up until 3 weeks ago? Tell us what you think!
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