Raising Prices Not Customer IreBy Greg Harris
If there is one thing we are all sensitive to, it's a price change. No, Jameco is not changing its price leadership strategy, where we actively set our prices below our competitors. I'm talking about the recent announcement by Netflix, the popular movie rental service, that it will soon raise its prices by as much as 60%. What's startling is not that prices are going up, but the consumer outrage that has swelled to a fury.
All companies must constantly evaluate their pricing strategies and a free market means that companies will frequently test the market to see what it will bear. In this case, however, Netflix failed miserably in their communication strategy and the result appears to be many unhappy customers.
Lots of companies have successfully raised prices, so what did Netflix do wrong and what could they have done differently?
According to a CNET poll, 72% of readers (with more than 18,000 votes tabulated) have or will cancel their subscription in protest to the price increase. Whether or not that pans out, it's clear that Netflix has a PR nightmare on their hands.
Before diving into the mistakes Netflix made let's establish a few facts. Netflix last raised prices in November of 2010. Netflix reported an operating income of $267M last year and $102M in the first quarter alone.
In its July 12th press release a Netflix executive was quoted as saying, "By better reflecting the underlying costs and offering our lowest prices ever for unlimited DVD, we hope to provide a great value to our current and future DVD-by-mail members." In addition, the company suggested that the migration to streaming movies was slower than they had anticipated and that the continued demand for DVDs by mail was surprisingly high.
Let's parse this out and compare what they say to what an average customer is likely to hear.
|The transition to streaming technology is moving slower than anticipated.||That's not my fault. None of the good movies are available for streaming.||The company suggests they are responding to customer behavior as opposed to demonstrating ownership for its role in the problem.|
|The new pricing better reflects the underlying costs.||If that were the case they would have simply raised the prices, but it's hard to believe that a 60% increase is required. Unless of course the company is losing money.||The old pricing that didn't reflect costs generated record profits in the first quarter of 2011. Their 39% gross margins (and growing) seem to be reflecting their underlying costs quite well.|
|Our lowest prices ever for unlimited DVD.||Hmm, is that a typo? Shouldn't it say "DVDs" instead of "DVD?" Well it's not a lower price if half the value (streaming) is no longer included.||It's not a typo. They are reducing the price of the single DVD subscription. This version is held by a small percentage of people, but a price decrease on a smaller benefit is not a price decrease.|
|We hope to provide great value.||Empty words. Now they sound like politicians who do one thing and then claim to have done the opposite unless they forgot to use the word "someday" at the end of the sentence.||What they really mean is that they hope that the service will be perceived as a bargain relative to other entertainment choices even after the price increase.|
I'm not sure why Netflix felt compelled to make this move at this time, but what I do know is that they could have managed this much better. Over the years I've come to learn a few principals when it comes sharing bad news with customers.
CNET poll on price changes.
Netflix blog announcement.
Vice President, Marketing