Showing posts with label Netflix. Show all posts
Showing posts with label Netflix. Show all posts

9/24/11

How to Destroy Your Customer Base and Investor Confidence

Netflix used to have a charmed life.

This year, however, poorly thought out strategy and lurching decisions are stripping away many of its advantages and making it vulnerable to competitors.

Established in 1997, its founders saw opportunities in creating an Internet-based DVD-by-mail distribution system. It was designed to be a competitor to physical video stores, making it more attractive by offering a larger selection and using a unique IT driven distribution system that combined distribution centers across the country to serve customers within 24 hours at highly attractive prices.

The DVD-by-mail service became a hit, ultimately devastating the market of physical stores such as Blockbuster. By 2007 it had delivered more than 1 billion DVDs to customers. That same year it launched on-demand video streaming service so customers could also select a video and stream it to a PC (and later other platforms) for immediate viewing. The company allowed viewers a highly popular choice of physical DVDs or streamed video for the same price.

Effective marketing and the enviable distribution system led the company to became the largest video subscription service in the U.S., with 24 million customers

Despite--and because of the investments required for--its growth, the company was losing money on its $10 per month price for the joint service, so it suddenly increased it price to $16 dollars (a 60% increase) in July. That significant price change and the poor way it was introduced to customers—especially in the midst of poor economic times, angered customers and created price resistance that led a least a half million to drop the service.

Then, in September, the firm announced it would spin off its DVD-by-mail service and rebrand it Qwickster, leaving Netflix with the digital streaming business. Customers were furious to learn they would now have to pay separately for both services. By downplaying its DVD-by-mail business, the company hopes to reduce distirbution costs and its costs for content by moving content from a per rental basis to per subscriber basis that is more beneficial for the firm.

Netflix's decisions were not made with a customer focus, but a focus on stemming losses that worried some investors. That strategy is dubious, however, and share prices have fallen from nearly $300 per share in mid-summer to $140 per share.

The lurching changes have also made the company’s position seem vulnerable, leading to new competitors to enter the market. Dish Network, which bought Blockbuster out of bankruptcy, is now using it to introduce a competing DVD-by-mail and digital delivery services at competitive prices and Hula and Amazon are reportedly looking a ways to exploit consumer dissatisfaction.

The entire episode is a classic example of why companies should never take customers for granted and why company decisions need to be driven by creating--rather than subtracting--value for consumers.