Netflix: 3 Lessons From the Pricing Fiasco [UPDATED]

It is by now fairly well known that Netflix had a little bit of a boo-boo recently in switching its pricing plans to force people to pay separately for physical DVDs and streaming.  Customers left the service in droves.  They tried to distract/counteract with an announcement about launching in Latin America, but to no avail.  More customers left than expected, they had to revise their guidance downward and they took a beating on NASDAQ.

Now, I like Netflix very much, and I don’t want to pick on them unfairly – according to their records, I have been a loyal customer since May of 2000, which is a lot of years for those keeping score at home.  But we cannot pass up this chance to purse our lips, grab our chins and shake our heads sagely.  Lest this excellent case study go to waste, let’s ponder what we can learn from this.  Three primary lessons leap to mind:

  1. Don’t irritate customers or give them an opportunity to leave during difficult economic times.  Everyone had their Netflix account on auto-pilot, quietly charging too much money each month to their credit card while the DVDs in red envelopes gathered dust and the old episodes of the Rockford Files when unstreamed.  Forcing them to re-evaluate this, reckon with the truth, and make a decision about how much to spend right in the middle of a monster recession (at a time when consumer confidence is at a low, and vacation spending and summer gas prices have drained the bank accounts) was not a smart move.
  2. Respect the power of the bundle.  Netflix had good reasons to try and nudge people from physical DVDs to streaming.  But they got it wrong in their forecast of how many would go with DVD only.  When it was part of a bundle and priced at 10 bucks, people could see their way to paying it as a way of preserving access to a fuller and more recent selection of movies.  It felt like it was sort of a value if you didn’t over-think it.  But it required planning ahead, it was a bit more work and inconvenience, and it was kind of a pain to guess what you were going to watch way in advance.  So when they boosted the price by over 50% and then told people to eat it or walk, several hundred thousand more people walked than they expected.  That’s the power of a bundle blowing up in your face.
  3. Beware of unintended consequences.  In retrospect it seems foreseeable that monkeying around with pricing would stir up at least a little trouble.  I am sure that the capable managers at Netflix planned for different scenarios.  But in situations like this, you can never take your planning far enough.  In particular, you need to model not only the obvious what-ifs, but the less-obvious ones plus the reactions that follow your reactions.  You need to plan a few moves ahead.  On their earnings call, Netflix made it clear that they had modeled the numbers, and they clearly had lots of text prepared around their rationale for the change.  But when they were faced with a huge customer backlash and a lot of negative PR, and then their forward-looking numbers started to look increasingly off, and they were scrambling to deal with revised guidance for Wall Street, it became pretty clear that they had not planned for the clusterf*ck that ensued.  In car racing this is called “running out of talent” and it is what happens right before you crash.  With a little more planning for what comes after the next curve, and some consideration of what the other drivers might do if you swerve, you can avoid some of the unnecessary fender-benders.

So there you have it: three good lessons from Netflix latest snafu.  What bone-headed decisions had you been thinking about making?  Hopefully this cautionary tale will save you from yourself.

UPDATE ONE:

It is not often that a company breaks major news when you are right in the middle of writing a blog post about them, but that is what happened with Netflix last night while the original post was being written.  So things are all tidied up?  Not by a mile.  The next chapter in this saga has been outlined.  Netflix has offered a heartfelt apology and split their business into two halves – Qwikster for DVDs by mail and Netflix for streaming content.  Some applaud CEO Reid Hastings for having the courage to confront the “innovators dilemma” head-on and split the businesses so that each can be maximized to its fullest extent without robbing the other of resources.  Others are mocking him relentlessly with rather humorous tweets (15 funniest tweets here and irony alert: Uh Oh … Qwikster Already Has A Lively Twitter Account, But It’s Not Owned By Netflix).  Others see this as yet more fumbling by a company that just cannot seem to stop screwing up.  I am inclined to agree with that last group in the short term – they seem to be having a bad run at the moment – but I think over the long haul this was a good move.  My instinct is that the subscriber departures will slow and stabilize, the company will be better off for the decision to split and this kerfluffle will be forgotten.  That doesn’t mean Netflix is totally out of the woods.  They have made it this far on great execution, but the streaming world is a different world and the content providers seem very wary of allowing them to consolidate much power (or content).  It will be interesting to see how this plays out.

UPDATE TWO:

A consensus seems to be emerging that the increasingly complex pricing being imposed by the content providers is behind this.  For a good explanation of what could be going on here, see What’s Really Behind The Netflix/Qwikster Split.

UPDATE THREE:

None other than Roger Ebert has weighed in on the side of Netflix in a Business Week article on the subject: Roger Ebert: Netflix, Hastings Get it Right.

UPDATE FOUR:

Saturday Night Live has jumped on the bandwagon with an excellent spoof of the Netflix shenanigans:

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Comments

  1. I couldn’t help but hear “NEW COKE” ringing in my ears when I read these trainwreck headlines. They seem to have convinced themselves that an internal corporate divorce was in the best interests of “their” own (each side’s) customers. Somehow I doubt that, as your point about bundling makes clear. Great post, thanks!

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