Wednesday, October 12

Saying Whoopsie: Netflix Actions Still Speak Louder

"This means no change: one website, one account, one password ... in other words, no Qwikster." — Reed Hastings 

After several trials and a comedy of errors, CEO Reed Hastings is trying one more time. The message is shorter. The writing is sloppy. But at least people understand what it means: No Qwikster for Netflix.

Qwikster was the proposed solution to accomplish Hastings' long-term goal to completely separate Netflix from the DVD shopping and shipping business. To date, it only accomplished one goal. The restructuring was ridiculous enough that it has all but quelled the alarm over Netflix price increases in July.

Reed was clear about that too. "While the July price change was necessary, we are done with price changes," he said once again. Qwikster, even though the company had already reported it had divided itself into two units, obviously was not necessary. According to some, that makes Qwikster a modern equivalent of New Coke. I don't think so, exactly.

Communicating Change And Price Increases. 

In a few years, assuming Netflix recovers and it probably will, some will ponder whether the price increases and subsequent Qwikster campaign generated publicity and brand awareness that will pay dividends at the bank later.

Maybe it will. Maybe it won't. My take on the whole buzz up is that it didn't have to happen.

Communicating change, even uncomfortable change, is relatively easy. Had Netflix given customers a head start and a better pricing model, it could have raised prices on DVD shopping and shipping and incentivized the move to streaming. The majority of subscribers might have voluntarily switched.

And if the company was serious about skipping out on DVD shopping and shipping, it could have eventually frozen new DVD subscribers some time after the switch. Eventually, the DVD division would have died a quiet and less painful death. No big deal. Netflix knows DVD mail programs are numbered because product purchase and shipping costs are too expensive to make a profit.

Netflix wants to be a streaming service and anybody who doubts it ought to look at its investor relations overview. Nowhere does the description include anything about shipping. On the contrary, the description emphasizes 25 million subscribers over 200 devices. At $8 per subscription, that's $200 million per month without the hassle of pressing discs.

The solution was painfully simple, but overlooked. All Netflix had to do was make its DVD shipping product less attractive over the long haul by making it pay for itself. All the while, it could have been up front and honest with customers that the cost of products and shipping caused the price increases, much like utilities do every year.

At the same time, incentivizing the switch would have made sense because Netflix could probably bank on the idea that most people who try streaming are less likely to go back to shipping. It could have even partnered with some of the device manufacturers, underscoring how easy it is (and encouraging people that today might be the time to upgrade). It all could have been handled seamlessly and without the silly spin of calling a "price increase" a "price change."

Who cares what Netflix does anyway and why does it matter? 

Beyond investors and subscribers, it really doesn't matter. It also makes for a great case study in communication. And the reason there is some significance is simple enough.

Netflix prides itself on the following four traits in an increasingly competitive market: outstanding value, robust selection, customer satisfaction, and adaptability. It believes this is what sets it apart in the marketplace.

The handling of the communication in recent months, especially because the company prolonged the negative communication, cuts deeply at three of those four traits. Customers felt the new price change was not an outstanding value. Customers felt the decisions eroded customer satisfaction. And customers believe that while Netflix might be adaptive, it is not adaptive to the customers it serves.

The worst communication practice for any company is to communicate against the value proposition of the company, especially if it disproves the majority of them. Investors clearly did not appreciate the missteps. Netflix stocks dropped to almost a third of their value (from around $300 to $100 per share) before the price increase. In other words, the lost valuation may have paid for the price increase.

But the real indicator is yet to be announced. On October 24, Netflix will have to report its earnings. And along with those earnings, an accounting of how many more customers are disenfranchised.
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