In July 2011, Netflix stepped into a hornet’s nest when they sent out a short matter-of-fact email announcing the equivalent of a 60% price increase with almost zero explanation.
In case it is difficult to read the image, here is the text from the email I received on July 12, 2011:
We are separating unlimited DVDs by mail and unlimited streaming into two separate plans to better reflect the costs of each. Now our members have a choice: a streaming only plan, a DVD only plan, or both.
Your current $9.99 a month membership for unlimited streaming and unlimited DVDs will be split into 2 distinct plans:
Plan 1: Unlimited Streaming (no DVDs) for $7.99 a month
Plan 2: Unlimited DVDs, 1 out at-a-time (no streaming) for $7.99 a month
Your price for getting both of these plans will be $15.98 a month ($7.99 + $7.99). You don’t need to do anything to continue your memberships for both unlimited streaming and unlimited DVDs.
These prices will start for charges on or after September 1, 2011.
You can easily change or cancel your unlimited streaming plan, unlimited DVD plan, or both, by going to the Plan Change page in Your Account.
We realize you have many choices for home entertainment, and we thank you for your business. As always, if you have questions, please feel free to call us at 1-888-357-1516.
–The Netflix Team
“Okay, But WHY?”
Even the most inexperienced direct marketer knows that you must always give a reason why, especially when you’re raising prices and especially when you’re raising prices in a consumer market.
And yet Netflix overlooked this critical detail.
As you can imagine, the backlash has been vociferous.
Tens of thousands of angry Netflix subscribers published their reactions on their blogs and Facebook pages. More than 12,000 people left comments on the Netflix blog alone.
Obviously, the price increase was not well-received. In the two months following the price increase, Netflix lost a million subscribers.
After 69 days of hemorrhaging customers, Netflix finally issued a public apology on September 19, 2011. But it wasn’t much of an apology. Rather, it was another major announcement posing as an apology.
Major Announcement Disguised as an Apology
“I messed up. I owe you an explanation,” began CEO Reed Hastings’ email.
Yet the apology came across as a cover for more bad news.
Netflix would be separating its DVD and streaming services into two completely different business entities. The streaming business would retain the Netflix name; the “new” DVD business would be called Qwikster.
Hastings’s apology for not communicating with users about the price changes has made his customers even more upset, since he isn’t apologizing for changing prices but simply for not telling users about it more clearly. That set off a lot of backlash from consumers who felt it was a disingenuous apology.
Netflix customers are now complaining that splitting the streaming and DVD businesses into separate entities will make it more inconvenient for them because…
Now You Have to Manage Two Queues Instead of One
Instead of one centralized queue for all movies you want to watch, Netflix customers will now have two separate subscriptions, billed by two separate companies, with two separate movie queues on two separate web sites. Movie ratings and reviews posted to one site won’t be posted to the other.
In other words, the creation of Qwikster alongside of Netflix creates a lot of extra work for customers who would like to continue receiving DVDs by mail plus the ability to stream movies through the Internet.
Even though the announcement is only hours old as I write this, the Netflix blog has already received more than 13,000 comments — more comments than the previous price increase announcement received in two months.
It’s no surprise, really.
First, Netflix effectively increased their prices by 60%. Then they added insult to injury by creating more work for their customers by forcing them to manage two separate movie queues on two separate web sites.
More expensive and less convenient.
Not exactly a good recipe for winning over your customers.
How Netflix Could Have Done It Better
Now, I don’t run a publicly traded company, so I realize it’s a bit presumptuous for me to give Netflix business advice. Nonetheless, I feel they could have handled the present situation much better than they have.
Here are three specific ways Netflix could have done it better:
- Provide customers specific reasons for the price increase.
- Keep both DVDs-by-mail and streaming video under the Netflix brand.
- Continue offering customers a discount for subscribing to both services.
Let’s look at each of these in greater depth.
1. Provide Specific Reasons for the Price Increase
A 60% price increase is not insignificant even for a service that originally cost only $9.99 a month.
If ever there was a time to hire a professional copywriter, it was in a situation such as the current one. If I had been in charge, I would’ve written something like this…
First, thank you for being a Netflix subscriber. We’re in business to serve you in the best way we possibly can, and we thank you for your business.
Secondly, we have a very important announcement. We’ve been doing everything in our power to avoid a price increase these last few years. And yet we now find ourselves pressured into increasing our subscription fees.
With that in mind, the cost for unlimited DVDs by mail will now be $7.99 a month. And the cost for unlimited video streaming will also be $7.99 a month.
You can save $3 a month by bundling the services. The cost for both unlimited DVDs and streaming will be $12.99 a month.
We realize this is a significant price increase. Why so much? And why now? Here’s what’s been happening behind the scenes…
As you may know, the Post Office is not doing well these days. They’re losing billions every year and may soon go bankrupt. Because of this, they’ve been increasing the cost of postage. We now pay X% more to send a DVD through the mail than we did just X years ago.
After reviewing our books, we realized we have no choice but to increase the price of our plans to cover the costs of increased postage.
At the same time, we’re facing pressure from cable companies, movie studios, and other content providers. Many of our original licensing contracts have expired or will expire in the next 12 months. We are re-negotiating these contracts so that we can continue to provide you with the widest selection of streaming content possible.
Here’s the problem. Since we signed our original licensing agreements, we’ve grown a lot. Cable companies and movie studios are not willing to renew our contracts under the original terms. They want more money.
For example, we were recently negotiating with Starz. We offered them $300 million to continue licensing their content. This is ten times as much as we paid them X years ago. They still said no.
Liberty Media, a company that owns a major cable network, is trying to strong-arm us into raising prices much higher than the $7.99/mo. subscription fee we’ve settled on. It is a clear case of greed on the part of cable networks and movie studios, and we’re doing our best to keep costs as low as possible.
Clearly, streaming is the future of the movie and TV business. At the same time, the cost of licensing those movies and TV shows is going up. This is why we’ve found ourselves in the uncomfortable position of raising the price of our streaming plans at the same time we are raising the price of our DVD plans.
It is not ideal, and it’s not something we wanted to do. But circumstances have forced it upon us.
Please know this: The change in prices is going to allow us to bring you the best selection of streaming content we’ve offered to date. You won’t see our streaming movie library double overnight, but you should see hundreds of new titles starting in September and October of this year.
Again, we appreciate your business and your loyalty and will continue to fight to keep costs as low as possible while offering the biggest selection we can.
Your friends at Netflix
I believe a detailed approach like the one I’ve written above could have minimized the backlash and possibly generated some good will at the same time.
2. Keep Both Services Under the Netflix Brand
Clearly, keeping both the streaming and DVD-by-mail services under the Netflix brand makes it much easier for subscribers to manage their movie queues.
It also makes Netflix a stronger brand.
While some people are predicting the end of the DVD by mail business, I predict it will stick around a lot longer than people think. That’s because I think it will take many years before any company will have the ability to stream a movie with the same resolution as a Blu-Ray disc.
I recently upgraded my Netflix plan for this very reason. I wanted to be able to get Blu-Ray discs.
Frankly, I’d rather see a good movie on Blu-Ray. Better picture, better sound. I only use Netflix streaming when I’m less concerned about sound and picture quality. So I use it primarily for TV shows (like The Office) and cartoons for my kids.
3. Continue Offering a Discount for Bundled Service
Now that Netflix is introducing Qwikster, it will be difficult for them to offer any kind of discount for subscribing to both services. But it seems like common sense to reward people who are spending more money with you.
Not only that, offering a discount for bundling both services together would have softened the impact of the price increase and given back some control to Netflix customers. I don’t think the backlash would have been quite as severe if they had continued to offer this “volume discount.”
So, What Do YOU Think?
How do you feel about Netflix right now?
Do you think they’ve handled the price increase and apology well? Or do you think they could’ve done it better?
What would you have done if you had been in their shoes?
Please leave a comment below.
-Ryan M. Healy
- The Qwikster and the Dead
- Netflix splits DVD and streaming service
- Why Netflix is splitting itself in two
- What Netflix did right, and what it did wrong
- Did Starz Turn Down $300 Million a Year From Netflix to Make the Cable Guys Happy?
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