The Question Netflix Got Wrong

An interesting email appeared in my inbox Monday morning. It was from Reed Hastings, founder and CEO of Netflix. The subject line, “An Explanation and Some Reflections” got my attention. Was he writing to say that Netflix made a mistake when it implemented separate pricing for its DVD by mail and online streaming services? When I read the first three words of his message I was convinced- “I messed up” suggested Hastings was about to tell us Netflix had a change of heart about its new pricing structure.

Not so fast- he goes on to say “I owe you an explanation.” Hastings proceeds to provide justification for the decision to change the pricing structure. On top of that, he broke the news of Netflix splitting into two businesses, Netflix for online streaming and Qwikster for DVD by mail. Hastings’ message was genuine and the tone was that of someone who realized he had erred in handling the implementation of Netflix’s new business model. But, in the end the message was more of an attempt to save face… and stem the tide of customer defections. Netflix has lost an estimated 1 million subscribers since the change. With more than 20 million customers remaining, we will not shed a tear for Netflix, but the extent of customer defections is significant.

The mistake that Netflix made was that it incorrectly answered a huge question: What would customers do? What would they do after learning that their associations with Netflix of “entertainment delivered as you want it” no longer applied? The changes benefited Netflix only, or at least that was the perception of many subscribers. And, when it comes to brands, perception is reality. I remind my students often that the true owners of a brand are its customers. While a business owns the physical and intellectual property of a brand, its meaning comes from the relationships people form with it. For many subscribers, their relationship with Netflix was shattered when their ability to get entertainment however they wished changed.

I do not fault Netflix for arriving at a decision that changes were needed in its business model to preserve the long-term profitability of the business. But, most everyone (including Netflix management) realizes they damaged brand relationships in the process. So, any change in strategy should be evaluated fully in terms of how customers will react to change? Human nature is to resist change. Marketers must be prepared for the resistance by being able to make a strong case for how change is good for the brand’s real owners.

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