Sunday, July 17, 2011

Netflix Introduces a Plot Twist

Last week Netflix introduced a major plot twist to the movie watching habits of its customers. The movie subscription service announced that they would be raising the price of its unlimited subscription by sixty percent- up to $16 from the previous ten. Since news of the price hike broke, the company has been paying the steep prices itself, thanks to a vocal group of angry customers.

Rightfully so I believe. What customer wants to pay more than they have to for something? This is the risk a brand takes when it chooses to raise its prices by making a giant leap as opposed to taking incremental steps toward the new prices. The new price will naturally jump out and raise eyebrows- leading to brand's getting attention for all the unwanted reasons. So unless the brand can fully explain and justify the price shocks to its customers, then raising their prices in this manner is a considerable misplay of marketing strategy. That's a tough task for any product but especially so for a discretionary entertainment product such as movie rentals. Up to this point, I don't believe Netflix has explained this to their customers well enough. Citing their own costs is simply not enough either.

While it's an everyday occurrence that businesses justify raising (or setting) prices by analyzing their costs, I think its wrong to do so. Perhaps this is a secret among marketers, but customers simply don't care about your costs and have no interests in preserving your margins. Why should they? Their bottom line approach says that if you're business cannot produce a good or service at certain price, then that's you're problem to deal with. Instead of your costs, what actually drives a customer is value. At a certain price, can your brand deliver value that exceeds the cost. In the case of Netflix, when the price becomes a lot higher than it was overnight, the value delivered by the brand will suddenly feel greatly diminished.

Despite the brand's insistence, speculation is that Netflix is attempting to move from a DVD-based rental service to one that delivers streaming content, providing obvious benefits of lower costs and faster delivery times. Although this strategy would present some major hurdles for the brand. I'd caution that Netflix should really consider the consequences of giving up its leadership position so easily. The second part would be, are they sure that they will be the leader in the new streaming video category? Personally, I believe there is enough evidence that new mediums create new category's, which also require new brands.

Secondly, if this is a strategy that Netflix is considering, I would really question the execution of it. Is the best execution for converting DVD subscribers into streaming video subscribers really by raising prices and hoping they consider Netflix's other options, despite their immediate anger? Are there ways to incentivize customers to adopt streaming video without disincentivizing them to their current products?

It's going to be very interesting what happens. Movie watching is activity in which consumers have plenty of options. Do competitors like Red Box step up? Perhaps subscription movie channels (which can be DVR'd) step up and put pressure on Neflix. Or maybe the competition will come from somewhere else- by a brand not yet to be born.

This post also appeared on Talent Zoo Media's Beneath The Brand.

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