How Netflix can fix its big mistake

This week Netflix emailed its subscribers to let them know that it would be raising prices on its DVD-by-mail and streaming plans. Netflix touted the “increased value” of the move for DVD-only subscribers, but if social media feedback is any indication, it seems that most folks still want the streaming-DVD combo platter and don’t want to be forced to choose.

While Netflix’s explanation of the move to separate streaming and DVD plans makes some sense due to the increased cost of licensing content, the reality is that its subscriber base isn’t ready for the move. In all, I believe Netflix made three mistakes in this move that ultimately could result in some substantial churn in its user base:

  • Too much spin. Netflix couched what is essentially a 50 percent price hike for the equivalent basket of goods as the “best prices ever” and increased choice. But most saw through this right away, and it struck many as downright disingenuous.
  • Streaming library too weak to stand alone. Netflix assumed that its library of streaming content is ready to support this move: It isn’t. While many streaming users consume the majority of their titles through streaming, the library is too thin to make it the sole source for most, particularly since DVD demand is still rising.
  • Competitive openings. It underestimates what a leaner Blockbuster and an already-lean Redbox might do in response to attract unhappy Netflix subscribers. Blockbuster is already going after Netflix customers, and others likely will too.

The company not only expected something of a backlash but staffed up to handle it, but I believe for the reasons above that it still underestimated the magnitude of the response. Initial indications show that it is holding firm on its pricing. But I think Netflix should consider the following options or risk losing subscribers.

First, admit mistakes

Unlike politics, admitting a mistake is not lethal in the world of consumer web services (unless it involves a security breach — sorry Dropbox and Sony). Netflix could gain back its customers’ goodwill by admitting that it screwed up, both by hiking prices by 50 percent so suddenly and also by communicating it poorly.

Of course, it ultimately will need to do more than just apologize. Here’s what else it should do . . .

Grandfather the seniors

Much of the disgruntlement is centered on the fact that Netflix’s most loyal customers were treated like everyone else. Justified or not, many felt slighted by a company they’d been supporting for some time.

The company could have created significant goodwill by grandfathering loyal subscribers to lower pricing for the next 12 months. During that time, they’d likely get over the hike. It would also allow Netflix time to increase its streaming library. The company could have even offered “graduated grandfathering” by providing the longest-using subscribers with the biggest discounts, while more recent users got smaller discounts for the coming year.

Lower price for stand-alone streaming

If Netflix really wanted to convert people to stand-alone streaming and not piss them off, it should have dropped the price of streaming in conjunction with this announcement. The existing stand-alone streaming price, which debuted last November, was $7.99, and a simple $1 price drop to that plan would entice many current consumers who are resistant to being pushed onto a streaming-only plan.

Emotions are high this week among Netflix nation, and only time will tell whether the premium streaming leader will see significant cancellations. While some feel that much of the backlash is temporary, I think many consumers will not agree to a 50 percent price hike for a combined package.

The end result could be some people simply canceling or being lured away by a competitor. Blockbuster has already responded with a 30-day free trial. And right about now would be the perfect time for Redbox to launch its long-talked-about streaming service and undercut Netflix with a combined rental-streaming service plan.

Question of the week

Do you think Netflix made a mistake with its new pricing structure?
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Michael Wolf

Chief Analyst NextMarket Insights

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2 Comments Subscribers to comment
  1. The price change would have made no difference two years ago. Netflix had no competition. As Michael pointed out, now it’s plenty. And more will come. Netflix needs to grow by acquiring other companies and technologies, no matter how much in-house expertise they think they have. If they can not do it, they will be acquired eventually. One thing is certain. They must change, cleverly They also must eliminate their dependency on AWS for their IT and streaming

  2. Michael E. Dortch Friday, July 15, 2011

    The inadequately considered pricing gaffes pale in comparison to the almost laughable “spin control” Netflix demonstrated. The company has created enough confusion, anger and disillusionment to tarnish its reputation considerably and to create active consideration of alternatives beyond Blockbuster and Redbox.

    Amazon already offers streaming (albeit without iOS support so far). Hulu Plus is gaining momentum. HBO and Showtime already offer subscribers “to go” options. and iTunes streaming looms large. Even Walmart’s online Moviecenter streams some content, and offers free in-store pick-up for more. The clock is ticking for Netflix, and restive users won’t wait too long before seriously considering these and other alternatives.

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