Editor’s note: This article was first published in October 2011, right after Netflix reported losing subscribers following its price change and announced plans to spin off its DVD service. Its view of Netflix as still expanding reflects that moment; Netflix launched in the UK in January 2012.
Netflix was sailing full steam ahead, sure of its course, but like the Titanic, it has run into an iceberg. Netflix did not know its own customers, and as a result it has lost more than 800,000 subscribers in just over four months. Once the news broke, it made no difference that the company’s revenue was up on the previous year: the New York stock market punished it too, with a 27% drop in its share price.
Where did Netflix go wrong?
In July this year, the company announced that it would separate its DVD and movie-by-mail service from its internet service. If you only want one of the two, the change doesn’t affect you, because the fee stays the same (around $7.99 a month). But a customer who wants both will go from paying $9.99 to $15.99 a month.
Before, both services were managed from a single account with one username and password. Now the customer would need two accounts and two passwords. At another time that might not matter much, but when the customer is also being asked to pay more, it becomes one more annoyance.
1. Netflix knew what suited the company in order to make its business more profitable, but at no point did it ask users what they wanted.
2. Not only did Netflix not ask, it didn’t even bother to run a small study of how many subscribers it might lose by taking a decision without consulting the real boss of the company: the customer.
3. The brand was perfectly positioned thanks to the business that made it grow, which was delivering DVDs and movies by mail. When you split the business, you split the strength of the brand.
4. Quick, constant changes are not good. People need time to adjust. Netflix is still expanding, and in fact plans to enter new markets such as the United Kingdom. The usual advice is that when something is going well and making money, you leave it alone in case you break it, which is exactly what happened here.
5. A mistake in the fix:
Once Netflix realized its mistake, it apologized in various media, admitting that separating the two services was the wrong decision. It will reverse the split but keep the higher monthly fee, and many users still don’t like this new solution.
Netflix still has a good track record, and this drop in its share price may even be a good investment opportunity: as we said, the company is in an expansion phase and has just suffered a temporary setback. It may never win back those 800,000 lost users, but there is no doubt that it holds the business model of the future when it comes to film.
On top of that, its management has now learned a lesson: you have to listen to the customer and think carefully about the consequences of what you do. For the rest, I’m sure the company will recover its stock market value, as long as it understands from now on that a company is made by its customers.
Featured image: Marit & Toomas Hinnosaar, CC BY 2.0, via Flickr.
