I winced recently for Netflix. How did they decide on a course of action that lost them 800,000 customers? …and where do they go from here? I’m going to answer the second question first. They are doing the right thing in reversing course and listening to their customers. Which brings us to the answer to the first question (and the point of this blog post). The answer to the first question is they got caught up in what they wanted and ignored what their customers valued.
It’s not hard to imagine how they strayed. We work with clients interested in profitable growth all the time. Being profitable is an excellent goal. It makes the company profitable and creates choices for us that unprofitable companies don’t have.
Netflix has two business models, each based on a different distribution process: 1) DVDs through the mail and 2) streaming over the internet. Streaming over the net as a distribution model is much less costly than dealing with the physical realities of fulfilling orders for disks through the mail. Internet distribution eliminates the labor associated with order fulfillment: picking disks, stuffing them in envelopes and putting them in the mail. It also eliminates costs on the return side: opening the mailer, removing the disk and re-stocking. It’s easy to see that this is an excellent improvement in the cost of the disk sending and return sides of the rental transaction.
Netflix investors no doubt thought it would be great to have the internet version of the business without the disk version. In fact, if they could indeed sell the disk version of the business, the proceeds could be re-invested back in the streaming version and be used to increase the performance of that business.
Of course the fly in that ointment is customers hate the idea of being charged more for the disk only version and resent being told how they have to do business. So they quit in droves, to the tune of 800,000 customers.
So now what? In situations like this, where a business inadvertently betrays their customers, they need to beat a hasty retreat. Which is precisely what Netflix did. They scrapped the idea.
Customer intimacy avoids this issue. The lesson here is, don’t make a major move without asking customers how they would feel. Here is a case study of a client situation where GBQ Redbank did just that. At the time the client was considering a combination with a related business. We checked with their customers and found conclusive evidence that they are better together. They are now working on strategic initiatives to combine forces.