The Netflix Price Increase: Did They Make a Good or Bad Decision?

The Netflix Price Increase: Did They Make a Good or Bad Decision?
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Netflix Update: October 10 2011

On Monday October 10 2011, the Netflix Blog posted this statement from CEO Reed Hastings:

“It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs.

This means no change: one website, one account, one password… in other words, no Qwikster.”

Netflix Customers Get Angry in July

As a Netflix customer myself, I used to pay around $16 a month to get up to three DVDs at once and free movie streaming via my Wii game console (you need a disk from Netflix to do this). However, since I purchased Apple TV, gone is the Wii console as Apple TV offers both YouTube and Netflix streaming and I’m not much of a Wii gamer anyway.

In July of 2011, Netflix announced it would be raising its prices (I’ll talk about their too-late apology a little bit later) for those of us who decide we want both streaming and DVD mail-to-us rental options. Or, a subscriber could opt for one or the other. Here’s a basic example as offered up by a story in Reuters by reporters Yinka Adegoke and Lisa Richwine:

The base package which cost around $8 per month for one DVD mailed to you at a time and unlimited streaming rose to $17 a month or an approximate 60 percent increase. The option I had where I could get three DVDs at a time via snail mail and unlimited streaming was around $16 a month and is now up to $21 per month. Understandably, I was one of the customers in August who logged onto my account and kept only the streaming option, opting out of the mail DVD service.

This decision hasn’t been well-received by Netflix customers, but now that I have cancelled my Netflix DVDs by mail service my monthly nut to Netflix is around $8 plus tax—quite a savings from $21 per month.

Beyond the anger from customers, top Netflix executives are looking at some gloomy numbers since they raised prices. According to the article in Reuters, Netflix Chief Executive Officer Reed Hastings, reported, “Fewer customers than expected are opting to take Netflix’s DVD-only subscription package. Netflix now expects to have 2.2 million such subscribers, down from the previous forecast of 3 million. The company also cut its forecast for streaming-only subscribers, to 21.8 million (down) from 22 million.” Whoa here folks, that’s a lot of people changing their minds—millions actually.

And that’s not all the woes for Netflix—their stock prices dropped 19 percent due to this price increase (down to $169.25 on Nasdaq as of September 15 2011). As one Wall Street Analyst, Michael Pachter of Webush Securities said, “They can’t have the perfect world where content stays cheap and people sign up at low prices.” Nope that really never works in the real business world because as our economic outlook is glim, most business expenses remain the same or go up and small business owners know all too well when what’s coming in can’t pay for operating expenses or payroll, there’s a problem—a big one. Eventually, if you need to make a decision on either raising your prices or cutting other things such as employees, it’s usually the employees who go. A hard truth but a true statement indeed.

Netflix is also receiving harsh criticism from Hollywood—both satellite and TV cable providers who feared a takeover of movie streaming from places such as Netflix meaning their offerings, such as pay-per-view, were out of the viewer’s attention. Streaming at a lower price than a pay-per-view movie—not bad eh? I can see where these companies could be angry, but Netflix has been around for a while (14 years actually) and as a customer, I can’t say I’ve ever had a complaint they couldn’t resolve—almost immediately.

But does their customer satisfaction base warrant a price increase and now two companies?

Brilliant Minds?

Is this a Brilliant Move

Netflix’s Chief Content Officer, Ted Sarandos offered to Reuter’s reporters, ““Being able to precisely forecast and predict the behavior of that many people on fairly radical change is something we’ll get better at all the time.” What does that mean exactly, Ted?

As a business owner, I can translate this for you. People aren’t going to as many movies and they’re finding options such as Hulu TV and other free ways to stream video content to their computers and televisions. Then there are those so interested in the newest technology like Apple TV or Sony’s PlayStation Mega Monster Version 900 (this doesn’t exist, but it sounds good doesn’t it?) that are willing to pay more for streaming while also keeping the mail-to-me DVD option.

Blows the mind really, but this is true to some extent. For example, you can’t stream everything Netflix offers from their DVD library—only a select amount of television shows and movies offer streaming and “new releases” under streaming are often movie hits from six months or a year ago. So if one wants the newly released movies right from the theater, they really do need to keep the mail-to-me DVD option—especially if the entire family is a “We need to watch that newly released DVD right, right now!”

However, I do think Netflix woes are a little overstated here and the million subscribers lost in the third and fourth quarter of 2011 will most likely rise again in 2012 because people are not willing to sacrifice when it comes to entertainment in their homes—it’s convenient and easy.

The Netflix Apology - A Little Too Late?

CEO of Netflix Apologizes

Good old Reed Hastings (CEO of Netflix) posted an apology on September 18, 2011 to all Netflix customers. Hastings went on to say “I messed up. I owe everyone an apology.” Darn tooting you do, sir.

One thing I didn’t like was how Hastings mentioned Borders Bookstores as a sort of example of not foreseeing what customers wanted, forcing them to close. Don’t slap down another business already gone under dude, that’s not making you look any better. Just stick to the facts.

I’m also not impressed how Reed called his blog post not an apology but “an explanation and some reflections.” In the Netlfix blog apology (link in reference section), Hastings did apologize but it’s what people see in black and white first right? An “explanation” or a “reflection” could mean anything but neither word is a great substitute for the word “apology.”

Netflix is evolving and will now introduce “Qwikster” which shall become DVD rentals only and no streaming. Streaming capabilities will now be handled by Netflix - two separate divisions, if you will. Sure you can’t get both via the old Netflix avenue because now there will be two companies and two websites unless of course you want both.

As I said above, before Reed apologized I opted out of the DVD mail delivery and now my monthly nut is around $8 plus tax, even lower than it was when I had both. Qwikster (DVD rentals by mail) will also offer customers the ability to order favorite games for PS3, Wii and Xbox, however, Hasting points out in his apology this will be an “upgrade” similar to when they added the ability for DVD customers to order movies on Blu-ray.

Get Ready for Qwikster

There’s a short welcome video (shouldn’t it be called a short apology video?) from Reed and the Netflix/Qwikster gang (well really only Reed and the very new CEO of Qwikster, Andy Rendich) and you can find it here. As one of my colleagues said to me, the announcement of a new company (Qwikster) comes after the apology. In her words, “You expressed your unhappiness and we’re listening. No, we’re not changing the price back, but we will change our name.” Oh boy how exciting, not one but two companies!

And, Reed was really nice pointing out that now “There are no pricing changes (we’re done with that!). Members who subscribe to both services will have two entries on their credit card statements, one for Qwikster and one for Netflix.” Just what we need, more items to check for accuracy on our credit card bills.

I wasn’t able to find out what the new Qwikster will be charging but pricing packages, most likely, will remain the same depending on the number of DVD movies you want delivered at one time and then of course there will be the extra cost for video games but no late fees.

I agree, the apology came a little too late but it did come and for those who really don’t want to spend extra money they don’t have and increase their home entertainment systems so streaming is possible, it’s a good idea all around really isn’t it? You can remain angry at Netflix/Qwikster and as a business owner you can also learn from this faux pax by using some common sense and excellent customer service first and then if your market deems it, raise your prices.

What About the Average Small Business Owner?

When Is It Time to Raise Prices

Okay, I know, I’ve been a little wishy-washy up to this point—is it a bad or good thing Netflix is doing by raising prices and turning one company into two? Forethought can be brilliant and video streaming is the way to go if your Internet speed is high enough. When I first obtained my Apple TV, I lived in a small town in New Mexico whose local Internet provider couldn’t handle the free movie streaming available from Apple. If I downloaded one, it told me, “Your movie will be available for viewing in 7 hours and 17 minutes.” What?

But a move to a larger city in Texas has provided me with faster Internet capabilities and my Apple streaming works fine. But again, as always, I digress and want to focus not only on the new Netflix/Qwikster but the raising of prices in general.

As a small entrepreneur, when is it time to raise prices like Netflix? An honest answer would have to be, it depends. Scary huh, but it really does depend on the type of business you have, how popular your product or service is and also some bad things you may be doing to survive in this economy such as offering too many discount coupons is really harming your business instead of helping it.

I for one know of one local company where I live who offers so many discounts, the sales staff is complaining they can’t upsell because consumers only want what they can get for free or at a drastically reduced price and they still expect great customer service. Hence, those making commissions from sales, aren’t taking home the pay checks they’re used to.

Massive discounts all the time is really never the way to go. Sure you might bring in customers but today’s consumer is a savvy consumer and they will take advantage of free or discounted services or products meaning the quantity of customers coming in your door doesn’t always mean more money for your bottom line.

On the other hand here, what Netflix is doing is taking the chance on losing money for a few quarters and then reaping the benefits on giving customers what they want—fast service, instant streaming capabilities no matter what option the end-user chooses (Wii, the Sony PlayStation Mega Monster Version 900 or some other gaming console device or a venue like Apple TV).

It’s all about customer service, folks, and if your business can’t get that right, raising prices should be the last thing on your mind. First you need to gather the staff you have together and get up to speed on top customer service techniques even if that means schmoozing up to customers all the time.

Once you’ve grabbed your customer’s attention and you know they’ll walk out of your business satisfied, a price increase may be a good idea as long as you keep customer service levels high. Because the consumer today wants to be catered to, they are choosing when and where to spend their valuable extra dollars. That decision is often made by how they are treated, not the price tag.

It’s Time to Analyze Your Market

Good or Bad Idea for Netflix

If you do think you’re already offering top of the line customer service and you get referrals left and right, skip the discounts and analyze what your market will bear. What I mean here is survey some customers and ask what they would pay for a product or service based on how well they were treated and if they would choose a discount offering just to save money.

Sure it’s important to pay attention to your competition, but it’s not always the only thing in your market analysis you need to worry about. Pleasing your customers at optimal levels is what will ultimately bring them back time and time again—even if they’re paying a few dollars more than what they can get a mile or two away.

Before I sign off here, I must say when I did move to Texas, my husband’s prescriptions followed us via the Walgreens Pharmacy family in the sky. One prescription he takes, although covered under our health insurance, is a formulary drug, meaning it’s more expensive. Walgreens, true to pleasing customers, invited me to check out other pharmacies—even offered up some names to see if I could get the drug cheaper. Turns out I could, but I’d only save $8 bucks to drive to another pharmacy and would end up having two places to pick prescriptions up from, thus it didn’t seem so great after all. So I paid the extra $8 bucks. The bottom line here was Walgreens customer service in aiding me to find a cheaper price.

So, I agree with the decision Netflix is making because technology is growing so fast, soon we may be able to stream movies just by thinking about them via some mind satellite in the sky. Where would the DVD mail-to-me option be then? I have already dropped it and now it’s not even available anymore unless I sign up for Qwikster!

What do you think about Netflix’s decisions? Do you agree? Do you disagree? I’d love to hear from you so drop me a comment. And yes, I know, there is no such thing as a Sony PlayStation Mega Monster 900—but wouldn’t it be awesome if there was!