Netflix: Bruised but not Broken

Netflix - bruised

I love the Netflix distribution model.  They are everywhere you want them to be.  Got a networked gaming console?  They’re there.  How about a new blu-ray player?  There!  A tablet?  There!  You don’t need an installation technician.  You don’t need any new equipment.  Just turn on your devise.  Connect it to your (wireless) home network.  Sign up.  And, you are in!  If you don’t have any of the approved devices, Netflix won’t leave you out!  Get DVDs by-mail.

Stop paying your cable company or satellite provider for VOD when you can just turn on Netflix.  Your cable bill is already sky high.  Yes, Netflix streaming library is a bit limited but you can supplement it with their great DVD-by-mail service.  Oh, the possibilities!…until

The price hike.  Two months ago, you could get a combined streaming and DVD-by-mail subscription for just $10.  Outstanding value—even with Netflix’ streaming content deficiencies.  Then, Netflix decided, if they took a 60% increase on the combined subscription, they could grow revenue and buy more content.  At the same time, they lowered the cost of streaming only and DVD-by mail only to $8.  Did they do this to keep loyal streaming only or loyal DVD-by-mail only customers?  No, they’ve told us in the past that combined service subscribers are the most loyal.  They probably lowered the price to keep an attractive price point for new customers—which most marketers know are more price-sensitive than existing customers.

So, if you take a big percentage increase (and a relatively small dollar increase) on your most loyal customers, will they stay?  To be sure, you will lose customers but the smart folks at Netflix figured out that you can grow revenue and still lose a few of your most loyal customers.  (And, don’t they need the money for more content?)  Here’s the problem:  These loyal customers were also Netflix evangelists. They told everyone in their circle about their Netflix experience.  And, now, they tell everyone how Netflix treats loyal customers.

I know the Netflix guys think the cable and satellite guys are dinosaurs but maybe they ought to hire a few dinosaurs; because the dinosaurs will tell you how important customer satisfaction and retention is as the business matures.  Retention is always the long term play.

So, the Netflix stock was badly bruised today, and, as an investor, I’m disappointed.  As a customer, I like the wake up call.  But, all is not lost.  Now—not 2 years from now—is the time for Netflix to think about improving retention and loyalty.  The plan:

  1. Go ahead and split the services.  Each business unit needs to focus on their unique customer experience and better understand their customer segments.
  2. Stop saying customers are disappointed in the decision to split the services.  They are not and it seems disingenuous.  They are disappointed in the size of the price increase.
  3. Repair the brand damage.  See #2 and hire a brand guru.
  4. Get more content.  It is much of the experience and more content equals more loyalty.  (Isn’t that why combined subscribers are more loyal?)
  5. Anticipate your competitors.  They are not too happy about Netflix’ effect on their ARPU.  Sounds like a pet, but it’s a measure of average revenue.

Netflix took a hit today, but they have time to turn it around.  As an investor and a customer, I am so ready for the turnaround.