Learning From Netflix’s 2011 Pricing Strategy Mistakes

“Never mistake a clear view for a short distance.”
Paul Saffo

“We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”
Roy Amara

Netflix increased prices by 60% for streaming media and DVD combinations and threatened to split their website into two halves–DVD and streaming, with separate queues and billing.

There have been several major pricing strategy mistakes:

• Arbitrary price increase of 60%
• Poor communication from the top
  • “apologize again to those members, both current and former, who felt we treated them thoughtlessly.” –Reed Hastings in “Explanations and Some Reflections” (emphasis added)
• Demonstrated lack of concern for customer experience: most customers want both DVD and streaming, two queues vastly complicates this experience and encourages them to split their purchases with other services.

But I think the core mistake Netflix made was believing that they saw clearly how the future was going to unfold and not taking the time to explain their plans and perspective to the customers. They didn’t want to wait.  People may not tell you when they stop trusting you but in Netflix’s case a million subscribers have voted with their feet in the last few months.

“For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming.”
Reed Hastings in “Explanations and Some Reflections“

This is not a “PR mistake.” A PR mistake is when you offer a poor explanation for a good decision. This was a business mistake:  they did not have the patience to engage in an ongoing conversation with customers about their needs and to share the internal understanding of the trends that were impacting Netflix’s business.

I think Jeff Nolan was prescient in his September 19 analysis of the price increase and service split at a time when many were praising Hasting’s willingness to disrupt his own business.

Netflix has in one act reaffirmed the pricing strategy that has cost them up to a million subscribers and split the brand into two entities, the unknown of the two being core business. Color me skeptical.
Jeff Nolan “When Smart People Double Down on #FAIL“

See also Lenny Greenberg’s well thought out response. As I re-read Hasting’s blog posts I was reminded of Mignon McLaughlin’s perspective on apologies:

True remorse is never just regret over consequence; it is regret over motive.
Mignon McLaughlin

Update Nov-30-2011 “Netflix is broken with no fix in sight”

“It is clear that a price increase was necessary, and equally clear in hindsight that a 60 percent increase on the hybrid customer was too much,” Pachter wrote to investors. “While we think that the company would have seen some customer defections and trade-downs at any price point, it is clear to us that the defections and trade-downs would have been less dramatic had the price increases been smaller.”

Last month, Netflix reported that it lost 810,000 subscribers in the third quarter and said that it expects to post a global net loss next year. Those losses and a rise in content costs have affected Netflix’s cash coffers so dramatically that the company was forced to raise $400 million earlier this month by way of a stock sale and private placement of convertible notes.

Update Feb- 22-2012: “Seeing Red“