Everybody who knows me knows that I am a big movie buff, and that it is very natural for me to go out on the weekend and rent a couple of movies. Today I drove to Blockbuster to rent a couple of movies (as I have seen most everything offered at Redbox), only to find that my local branch was closing down and had ceased all of its rental transactions. I was somewhat happy at first (as I never really liked Blockbuster anyways), but then I realized that this meant I'd be stuck watching Netflix videos from now on. Don't get me wrong, I love being able to watch streaming videos on my TV, but ever since the announcement (and subsequent retraction) that Netflix would be splitting its streaming video service and DVD-by-mail rental service into two separate Web sites (Netflix and Qwikster, respectively), it left a bad taste in my mouth. This is what led me to take a deeper look at the company, its dealings, and overall strategy.
Originally, Netflix offered their video streaming services for a flat fee of $7.99. Customers had the option of adding the additional DVD-by-mail service for an additional $2. This worked out great in the beginning as this attracted many new customers that may not have otherwise joined (the full $2 and part of the $7.99 went towards covering the cost of the mailings). However, as the number of new customers/month began to decrease, Netflix began having troubles making enough profit to cover the mailing expenses and licensing agreements. This was a legitimate problem, and the solution was raising the price of their DVD-by-mail services. This probably would have been a fine solution, but Netflix took this another step and tried to create an entirely separate Web site devoted to DVD-by-mail services: Qwikster. Soon after this announcement, 600,000 members canceled their Netflix accounts; Netflix stock also dropped 50 percent. The event also caused Amazon and Blockbuster to launch their own video streaming services and DVD-by-mail services (respectively) later in the year.
Even after having to deal with the backlash from customers, CEO Reed Hastings admits that there were many things the company could have done to "make it transparent to the customer, so it was less of a change." In order to accomplish this goal, the company should have been better at communicating their long-term goals to the public. For example, although the company began as a DVD-by-mail service in 1999, upper management knew the long-term goal was to move the service on-line (which is why they decided on the name NETflix). Had Netflix been more upfront with customers (given consumers a couple of months of notice), customers would have felt less cheated and been more open to maintaining their Netflix accounts; it would not have stopped customers from dropping their accounts, but it definitely would not have happened to the extent that it did.
Another strategy that could have been pursued would have been a cost-based pricing approach. Rather than attributing $2 to the DVD-by-mail service, the company could have swapped prices ($7.99 for DVD-by-mail services with the option to add video streaming services for $2). This probably would have been a lot more profitable for Netflix, as these prices are more in-line with their costs (it is cheaper to provide streaming video than send a DVD by mail). As an added benefit, the most attractive part of Netflix is instant streaming video. So if a similar announcement were made (an increase in the price of video streaming services) more customers would have been likely to keep their accounts.
If you are interested in reading more about the topic, here is an interesting interview Nightline did with Netflix CEO Reed Hastings: http://abcnews.go.com/Business/netflix-ceo-reed-hastings-company-sincere-regret-customers/story?id=14608865
