Posted by: brandextenders | September 22, 2011

What Netflix Can Teach Us About Business

Reed Hastings, Netflix CEO

Reed Hastings, CEO and co-founder of Netflix, is a visionary. He and Marc Randolph launched the company in 1998 as a competitor to the storefront rental chains that charged late fees and had limited selection. By mailing DVD’s to customers with no late fees and a pre-paid return envelope, the company thrived and by April of this year had 23.6 million subscribers for their DVD and streaming services.

Last month, Netflix suddenly said instead of one fee for both streaming and DVD’s by mail, they would separate those two businesses and charge fees for each. Instead of paying $8.99 for one DVD at-a-time and unlimited streaming, subscribers will now pay $7.99 for unlimited streaming and another $7.99 to get DVD’s at home. Additionally Hastings says a new business is being spun off called Qwikster with a new website where you’ll sign up if you want just DVD’s by mail.

You’d have thought someone kicked over a beehive as the response was instantaneous. Subscribers slammed Netflix on Twitter, the blogosphere and other social media outlets with their venom. In hindsight, Hastings realized the prescience Netflix has shown all these years in building their business model didn’t help when subscribers were faced with a doubling of fees, especially given the economic times.

So what can be learned from this debacle, both good and bad, that might help us in our businesses?

  • The Good: Don’t be afraid to try something new. It irked Hastings in 1997 when he returned a video to a storefront after the due date and was charged a late fee. This was the inspiration that led to Netflix with a business model that didn’t involve late fees. We can create businesses or enlarge existing businesses by being aware of what drives customer behavior. Step back from the minutia and see what your customers are asking for or what they don’t like. Brainstorm ways to satisfy those needs and you just might come up with an idea that could revolutionize your business.
  • The Bad: Don’t surprise customers with changes that drastically affect their pocketbooks. Ironically, in the mid 2000’s Netflix cut their pricing structure dramatically to compete with Blockbuster and was derided by pundits and told they would go broke. We all know it wasn’t Netflix that filed for bankruptcy. However this time they effectively doubled their monthly fee for subscribers that want DVD’s and streaming. A better tactic would have been to announce fees would be changing, what they would be and that they would take effect in six months. This would give customers time to digest the news and decide if they wanted to pay both fees, go with either streaming or DVD’s or leave altogether.
  • The Good: DVD’s are the eight-tracks of this generation. Just as video tapes disappeared so too will DVD’s in favor of streaming content over computers, iPods, iPads and other forms of storage residing in the “cloud.” Netflix understands the need to invest more heavily in rights for streaming media and knows eventually their DVD business won’t exist. Businesses must look ahead and understand that what works and is profitable today might not remain so in the future. Think film vs. digital cameras or dial-up Internet service.
  • The Bad: Many of us aren’t ready to give up the DVD’s, but also want the choice to instantly stream content through our computers or gaming systems. To do both we’ll pay a steep price which opens a window of opportunity for their competitors. Blockbuster’s miscalculations doomed them and the same could easily happen to Netflix if they continue to treat their subscribers so callously.
  • The Good: From a business perspective, this was a move that needed to be made. Hollywood studios are now imposing a per-subscriber-per-month licensing fee on streaming content whether or not those subscribers ever stream anything. By splitting the businesses, Netflix will now pay those fees only on those who choose streaming thereby saving the company millions. Smart companies do what they need to for long-term survival even if those moves hurt their business in the short-term.
  • The Bad: From the subscriber perspective this was a kick in the teeth. Understandably Netflix wants to discourage their customers from ordering DVD’s, a dying business, but the perception is Netflix doesn’t care about their customers. Always remember as a business, perception is reality. Politicians float trial balloons on important decisions to get a feel of how voters will react and businesses would be wise to do the same. Don’t make a decision in a vacuum assuming your customers will understand your motives.

While the negative PR will hurt in the short-term, I believe Netflix is making the right decision and in the end will be a far stronger company. Hastings was a visionary to start Netflix and perhaps that vision will now take the company into the next decade or two. What are your thoughts? Comments welcomed below.

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