Netflix, a service whose adoption rate has been growing at astounding rate of 3.6M users a quarter, has changed the way we watch shows and movies at home. They are one of the most successful tech firms started in the late 90s. Just think of some of their dot.com competitors: Excite, Kosmo, and Webvan and where are they now? Dead. But not Netflix. They invented a category that in 2008 was still being scrutinized by analysts. But they’ve clearly overcome a lot of obstacles. In fact, Blockbuster’s bankruptcy is largely credited to Netflix. This company has chops.
Yesterday, Netflix boosted its prices by an amazing 60%. Now in net dollars, it wasn’t that much money as the new pricing is still 20ish dollars, and some people will actually go down in fees if they line one type of delivery over the other. But context really matters. This pricing move came in a crappy economy; the US has nearly 10% unemployment and a consistently skittish stock market. The stories of average people holding two jobs to cover health care, and such are consistently dominating our news cycles. Not surprisingly, an outcry started immediately, reaching the maximum of 5000 comments on their blog. Even as I was writing this post, I had a search open for #DearNetflix and 250 new tweets arrived in 10 minutes. (I should point out only 1 of the 250 was positive/neutral; the other 249 were all talking of the Netflix Fail.)
As pricing strategies go, Netflix did 4 things wrong:
The Takeaway. Internet video streaming started at no additional charge with Netflix’s regular subscription service. Which given how it was rolled out, positioned it as effectively “free”. That let consumers deal with the fact that only a portion of Netflix’s content was available via the “Watch Instantly” option. It had a rather bumpy introduction. But what was more important? Customers were not told it was going to cost more, so expectations were not set. Streaming seemed like it was “included” in the base price. In retrospect, Netflix could have done this better. Perhaps they would have write something to their base to say:
Thank you for always being pioneers with us. We’re trying something new and we’d like to share it with you. We’re gifting this to you at no extra charge. Let us know what you think, and how it works. We know one day we’ll have to raise prices cause this is a big increase for our costs, etc. But for now, it’s a gift for our loyal customers, and we hope you like it enough to recommend more Netflix to more of your friends.
Whenever you raise prices, you want to add something to the offer, not take something away. Do a bundle of suites rather than raise each individual price point. Add features. Provide templates. The combination of not setting expectations and then doing this move is key to the flam-o-rama online.
Second, don’t raise prices on a less-than-awesome product. Delivery service is poor, the CD quality is random, and my none-too-statistical polling today would say 1/3 of streaming experiences with the Netflix service is less than awesome. Fix things before you raise prices. You want people to say “yeah, that price increase sucks, but man, I got it bad for Netflix. But instead, there were a ton of tweets like this one.
3rd Mistake: Wrong Pricing Strategy for Stage of Adoption. I’ve done pricing now over 20 years, first at Apple (they had a killer good/better/best play), through Autodesk years, for Adobe and so on. I’ve come to see only 3 relevant pricing strategies. I wont’ dig deeper into the details but here’s the thing: the one Netflix pulled is what you do after a company has arrived. You can jack prices when you have the category well established and you are – by far – the category leader. It’s what you do when there are few alternatives. It’s what you do after you own 85% marketshare. It’s what you do if everything is built around your standards. But this is not the move to pull at 7% market share of users. No, No, No. You don’t “revenue optimize” as Netflix just did at 7% market share; instead, you price to drive share growth. Netflix should be finding a way to get to every household at one price point or another. At 23 Million subscribers, Netflix still has to beat down the entrenched player of Cable, and make sure other entrants (i.e. redbox and especially iTunes) don’t come in and take disruptive position. If you believe you’re market saturated, then it’s fine to raise prices. Somehow, I don’t think that’s the message Netflix is aiming for.
Lack of Empathy. That’s surely the fourth thing they got wrong. And that‘s really what is behind most of the outrage. It wasn’t just that the price went up, it’s that the tone of the communication was so matter of fact about it. I find this to perfectly understandable. Netflix product managers are probably sitting in their cubicles and thinking customers aren’t going to like what they’re about to say, so they work really hard at just not being defensive. But this is when we businesses can (and dare I say, should?) be human. In fact, this is when it works to your advantage to show your humanness. When you have to make a tough choice, which this clearly is, it’s totally cool to say “this was tough, as we know that we’ve been offering a great value and now we have to change things”. I would have had Netflix say something like:
To grow what we can offer and make sure we get our library of video content even better, we started paying a lot of content producers, a lot of money. We need to do this price increase because it’ll help us get you the best content, and make your Friday evenings that much more enjoyable. And while we know that no change is easy, we hope one of these options will work for you cause, we love having you as a customer. One thing we’re doing to help with the transition is to leave pricing as is for our existing customers until 2012.
This pricing move is not unexpected. In November, it was released that Netflix is now a “primarily a video-streaming company”. Then, Reed Hastings just as much said he was going to have to do a price rise at the All Things D conference. But they got a few things wrong in the roll-out.
Well, what do you think about their pricing strategy? And what you would recommend they have done differently?