How to Destroy Your Customer Base and Investor Confidence

Written by Robert G. Picard Saturday, 24 September 2011 11:00 PDF Print E-mail
Netflix used to have a charmed life.

This year poorly thought out strategy and lurchingdecisions are stripping away many of its advantages and making it vulnerable to competitors.

Established in 1997, its founders saw opportunities in creating an Internet-based DVD by mail distribution system. It was designed to be a competitor to physical video stores, making it more attractive by larger selection and an IT driven distribution system with distribution centers across the country designed to serve customers within 24 hours at highly attractive prices.

The DVD by mail service became a hit, ultimately devastating the market of physical stores such as Blockbuster. By 2007 it had delivered more than 1 billion DVDs to customers. That same year it launched on-demand video streaming so customers could also select a video and immediately stream it to a PC (and later other platforms) for viewing, allowing viewers the choice of physical DVDs or streamed video for the same price.

Effective marketing and a enviable distribution system led the company to became the largest video subscription service in the US with 24 million customers

Despite its growth, the company was losing money on its $10 per month price for the joint service primarily because of the costs it was paying for content, so it suddenly increased prices to $16 dollars (a 60% increase) in July. That significant price change and the poor way it was introduced to customers—especially in the midst of poor economic times, angered customers and created price resistance that lead a least a half million to drop the service.

In September the firm announced it would spin off its DVD by mail service and rebrand it Qwickster, leaving Netflix with the digital streaming business. Customers were furious to lean they will now have to pay separately for both services. By downplaying its DVD by mail business, the company will reduce its costs for content by moving them from a per rental basis to per subscriber basis that is more beneficial for the firm.

The decisions were made not with a customer focus, but focus on stemming losses that worried investors. That strategy is dubious, however, and share prices have fallen from nearly $300 per share in mid summer to $140 per share.

The changes have also made the company’s position seem vulnerable, leading to new competitors entering the market. Dish Network, which Blockbuster out of bankruptcy, is now using it to introduce competing DVD by mail and digital delivery services and Hula and Amazon are reportedly looking a ways to exploit consumer dissatisfaction.

The entire episode is a classic example of why you should never take your customers for granted and why company decisions need to be driven by creating rather than subtracting value for consumers.