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Raising Prices Not Customer Ire

By Greg Harris

How to change prices without your customers going ape @#$%!

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 an announcement by Netflix, the popular movie rental service, that raised its prices by as much as 60%. What's startling is not that prices were 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 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.

What Netflix Said
What Customers 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. 1. Build Empathy. Customers can be extremely sympathetic to the needs of the company. No one will deny companies a reasonable profit. But the key to building empathy is to discuss and support your rationale. In this case, the argument about high costs don't seem to be supported by facts. 2. Manage Expectations. This is the "no surprises" rule. A slow transition from one price point to another would have been a much more successful strategy. Grandfathered pricing for current customers (treat them special) and different pricing for new customers is another transition strategy. 3. Don't Oversell. The phrase "our lowest prices ever" should not have been anywhere in this press release. While many of us heavily discount the overhyping claims we see in advertisements, we have a very different threshold for news. In this case the trust in Netflix has plummeted because their claims are not viewed as credible. 4. Customers First. Don't blame the customer. By focusing on unanticipated customer behavior the company is effectively blaming the customer. Instead of blaming customer behavior, the company should have found a way to add more value. New software, additional streaming titles or some other type of good news to wrap in the bad news. I haven't decided what will become of my Netflix subscription. I enjoy watching movies both on DVDs and on-demand, but no Netflix title compares to the drama of watching this marketing disaster unfold. Links reference in this article.
CNET poll on price changes.
Netflix blog announcement.
Netflix financials