6 Lessons for Executives from the Netflix Debacle

I was one of the millions of Netflix subscribers that received an email earlier this week from the CEO of the popular DVD-by-mail and streaming service Netflix apologizing for the way the company handled a recent price increase and explaining how it is going to move forward with two separate companies – Qwikster for its DVD sales and Netflix for its streaming.

The company has been lambasted for its handling of the situation, and this combined with a number of other factors including the loss of key content contracts that has limited what it can offer its customers, may mean Netflix – in the words of a blog by KK Bold, an advertising and branding agency  – is about to become a case study in "what not to do in business classes for years to come."

Here are some lessons, based on commentary around the Web and our own MDM content, that can be learned from how Netflix has handled the situation:

1. Make value, not price, your priority. Easier said than done, perhaps, but if you lose 1 million subscribers over a price hike as Netflix did, it seems you were selling on price all along, and the value of your service was secondary to subscribers. Subscribers are looking at a $6/month price increase for DVD + streaming video options to $16 (in a culture where someone will regularly pay $4 for a cup of coffee several times a month), while leaving cheaper options for DVD-only or streaming-only plans. Are there areas such as streaming where Netflix can improve the value they offer their subscribers, which could result in less price sensitivity?

2. Know what's really irking customers. Price increase aside, after the company announced the DVD-streaming split, Netflix is now losing or is at risk of losing customers who liked the convenience of having their streaming and DVD accounts in one place, as this blog argues. Customers are complaining that they now have to pay more and do more – meaning Netflix has made it more difficult to do business with them. Another reason some customers are mad: because they don't receive even a nominal discount for subscribing to both the DVD and streaming services.

3. Do something for loyal customers to ease the transition. As this blogger from the Washington Post points out, the people complaining about the changes are there for a reason: They love the service and don't want it to change. Netflix has received tens of thousands of comments on their website and social media pages. Reward that loyalty, she writes, by giving long-term customers a few months of free service or, even better in my mind, giving them a way to manage their now two accounts (due to the splitting up of the DVD and streaming services) in one place. Or provide a discount for subscribing to both. Tell them what's in it for them when you make the change.

4. Scope out and track your brand online. It's easy to discount social media and the Web when creating a marketing plan as many do in B-to-B markets, but you shouldn't. Turns out that Qwikster, the new brand for Netflix's DVD service, was already being used as the moniker for a foul-mouthed Twitter user. Not a great association for a new brand name that was already off to a rocky start. This would have been easy to find out with a quick search.

Tracking your reputation online is not a difficult task and requires little more than setting up a Google Alert for your brand names and conducting a regular search on the main social media sites for mentions of your name. You may not be able to prevent negative things being said about you online, but being aware of those things will help you better respond. Read this blog – Twitter: Not a Tool, a Real-Time Mindset  – for examples of how other companies have used social media and blogs to effectively and not so effectively respond.

5. As your company evolves, continually assess the competition to ensure you are still filling a market need and meeting that need effectively. As this article points out, Netflix has moved from a DVD-only model to one that was increasingly focused on streaming as a priority. But streaming video has a lot of competition these days, including cable company on-demand platforms, Amazon, Hulu, Google, Dish Network and so on. That doesn't mean that you can't survive with a new service in a new marketplace, but it does change how you approach the market and should result in a change in strategic plan. One thing I believe has hurt Netflix as it has attempted to make this shift: Netflix notoriously has a weak streaming library. Case in point: I regularly rent streaming videos on iTunes through my Apple TV for up to $4.99 a movie because they are new releases that aren't available on Netflix, and I don't want wait for a DVD in the mail. I'm willing to pay for that value a couple times a month, and my price sensitivity is not as high because of that.

6. And finally, when you are communicating with customers about a problem, be careful to hone in on the customers' concerns – and don't go much beyond that. Leadership expert Dr. L. Todd Thomas said in a press release I received earlier this week that Netflix CEO Reed Hastings' email to subscribers had the following faults: he said too much; he over interpreted his importance; he misdiagnosed the problem; he spoke down to his audience; and he reminded us what everyone was mad at Netflix. You can read Hastings' email in blog form here: An Explanation and Some Reflections

Netflix may come out of this one alive, if injured. The idea of splitting the business into two – one for DVDs and one for streaming – is certainly not receiving great reviews. Maybe Netflix can turn this one around and become a positive case study for business schools. Either way, it's worth taking notes.

What do you think about the uproar? Is Netflix's strategy and approach sound? Comment below.