It’s a sad saga. On the one hand, it demonstrates the wide ranging negative impact an ill-conceived change can have on a high-flying brand. On the other hand, it suggests that corporate arrogance can quickly be replaced with humility when customers voice their displeasure.
Such is the story of Netflix, which has been caught in a wild ride (a faltering stock price combined with customers fleeing for the exit) since it announced a price increase just months ago. The company thought it could smooth over the problem by spinning off its DVD-only rental service into something it called “Qwikster.” Apparently some marketing genius figured out that making a clean break from the rapidly growing streaming service was the answer to its very public bungle.[more]
Wrong. Qwikster was met with a maelstrom of derision and anger such that, this week, Netflix announced that it was deep-sixing Qwikster altogether. Reed Hastings, the chastened Netflix CEO, said in a statement that “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.”
According to Brian Stelter of the New York Times, the motivation for separating the DVD rental service from the streaming service “was rooted in Mr. Hastings’ belief that DVDs and online streams have different cost structures and different consumer demographics.” Sounds good on paper, but the reality is that the streaming service was growing on the back of the DVD service. While the future of Netflix might be tied up in streaming, the majority of its customers started by renting DVDs, and a portion of those same customers happily added streaming to their service package when the price to do so was a modest increase on top of their monthly subscription fee.
However, in July, Netflix announced a new pricing structure that not only unbundled DVDs and streamed videos, it also dramatically increased the price of a combined subscription from $10 per month to $16 per month. If Netflix wanted to quickly kill off its DVD service, playing with price may have been a sure way to do it, but the company wasn’t ready for the swift and relentless reaction. “The cancellation rate exceeded expectations,” writes Stelter. “The company said on Sept. 15 that it expected to report a quarterly decline of about one million [subscribers] in the third quarter, which ended on Sept. 30.” With 25 million or so subscribers, that’s 4 percent of the customer base gone in three months.
When Hastings wrote in a blog post on September 17 that “Companies rarely die from moving too fast, and they frequently die from moving too slowly,” he may have been too far ahead of his company’s customers. Clearly, Netflix wanted to capitalize on streaming, but from a legacy customer’s perspective, it was at the expense of the DVD business. Ironically, even as Netflix pushes streaming, its DVD catalog remains far more impressive than streamed content, which lags far behind.
So what can a brand learn from the Netflix screw-up? For one thing, a brand needs to respect the customers who made it successful in the first place. While the brand may be planning a whole new business strategy to lead it into the future, it shouldn’t take its existing customer base and throw it under a bus. Second, it might be wise to pre-test a radical change to pricing or a service structure with existing customers, get their feedback, and make refinements before making a big announcement. Third, when things go terribly wrong, it’s probably best to suck it up, admit to the error, and try to clean up the mess. At least Netflix got the third thing right.