“A Tale Of Two Cities” – Or A lesson On Managing Consumer Expectation
I’ve previously blogged on both the Netflix and the Amazon streaming models and talked about ramifications that they have for musicians and the music industry, but, as a Netflix subscriber, the latest PR boondoggle from the company is worth another post. (For those international readers who don’t have Netflix in their country, my apologies but you may still get something from this post).
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Back in July of this year, Netflix announced that they were changing their rate structure. Their blog got 12,000 angry messages from customers and their stock has been in free fall after announcing that instead of gaining 400,000 customers by October that they were likely to lose 600,000. (Yes, you’re reading that correctly, in terms of projected revenue – that’s a loss of a million customers). Netflix then added insult to injury with a strange (and mildly apologetic) email from CEO Reed Hastings to subscribers, explaining that they should have communicated better to customers what was happening with pricing and announcing a split in the company with one side serving mail orders and one side focusing on streaming. As of this writing, their stock continues to fall.
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From “I said, ‘No New Taxes’ “
Here’s an irony about the Boston Tea Party. The tea tax that was levied under the Tea Act that set the whole chain of events in motion that lead to the revolutionary war, was actually lower than what it had been. As soon as the colonists heard the term, “New Tax” they were up in arms and didn’t pay any attention to what the tax was.
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To taxing my system
On a more immediate and personal front, this last weekend I got mild food poisoning again I was out of commission for the better part of 2 days. Since I was bed ridden – I knew I was only going to do two things:
- Get a GuitArchitecture lesson post up – and
- finally check out AMC’s Breaking Bad – since seasons 1-3 were available on NetFlix.
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So for 2 days, I basically just streamed the show on my laptop while moving in an out of slumber. In addition to all of the other movies and TV shows on Netflix that I watch (at least 1 a day) – this was had for a price point of $8 a month. The few times I’ve had streaming problems I’ve actually gotten 2% taken off my bill with no prompting on my own.
As a means of comparison, cable television – which has about 5 shows that air once a week that I have any interest at all in following – is a $70/month bill.
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In contrast, Amazon.com also offers streaming movies.
If you are an Amazon Prime subscriber (Which is a discount shipping option for people who order a lot of things from Amazon) – you can stream select entertainment for free. Prime costs $79/year or about $6.70 a month.
But Amazon’s prime free selection is much smaller than Netflix, so for new movies you’ll pay anywhere from $2.99/$3.99 for rental ($6.99 for a theatrical and $9.99 for a pre-theatrical rental).
(Many of the same films for free on Netflix are often $3.99 on Amazon).
Amazon also has a time use restriction. Many of the films are only good for a day, several days or a week after you first watch them.
So for many people, Amazon would actually be the more expensive option – but (compared to Netflix) no one is giving them a hard time.
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What Amazon is doing right:
- Perceived value. Amazon Prime started as a member-driven shipping service and the free streaming is an added perk. For people who already had Prime, it’s a nice free perk and a reason to renew the service.
- Unique content. The pre-theatrical angle is a brilliant one, particularly with how huge most people’s TVs are now. Even at $10 a rental – that’s still a cheap night to have friends over with a pizza and a beer. They also have a number of films for streaming that Netflix doesn’t (though you’ll pay for those).
- Clear and consistent pricing.
- Customer perks. They run a $0.99 daily special and discount rentals on the weekend. Additionally, the 2 times I had streaming problems on Amazon they refunded the full cost of my rental. Guess who rented from them again?
As a ROKU owner, I, for one, was happy when Netflix created a streaming only option. Discs get damaged, scratched or beat up – and streaming seemed a very forward thinking option for me. But for anyone involved in offering a product (like a recording) or a service (like a performance) here’s a lesson to consider:
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Do research, build good will and explain changes before you make them
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Anyone used to a product or service expects consistency in both the service and the cost. This is why when you blast your air conditioning for the summer and your electricity bill doubles, it’s irritating but it’s not surprising. You understand that the bill is generated based on the power used – so if you’re using more power the bill will be higher.
As a mail order business, customers expect to get locked in on a rate. Understandably, some of them were enraged when they felt that the company changed the rules in the middle of the game. There could be a number of costs of business that made that change necessary – but without preparing people for why prices need to change – their get instinct is to kick back.
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There are a number of things Netflix could have done:
- Visible market research. They could have informed consumers that their pricing structure might have to change and see what they were willing to pay. In addition to informing the customers about what is going on, it gives people a voice so that when changes are made they at least feel like they have a say.
- Tiered (or discounted) pricing. They could have applied the pricing to new customers or offered a 6 month or a year grace period of initial pricing for existing customers. If customers understand that the prices may go up occasionally but that the company is willing to meet them part way – it helps build good will.
- Explain what measures their taking to keep pricing down. Netflix biggest content provider for more recent films is Starz (which maintains their own network). The renewal contract with Starz fell through because they wanted Netflix to charge a premium rate for their films – which Netflix wasn’t willing to add-on to customer charges. For customers used to paying a single monthly fee – this is good news but it wasn’t publicized at all and all the customers see is an increase in rates AND less streaming options to choose from (the contract runs out in February 2012).
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As Netflix’ value has dropped 26% in the days since the mass-email from the CEO, the second lesson here is:
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everyone makes a misstep at some point in their career, but the step after your first misstep may be the most important step you take.
- Know what you need to do,
- why you’re doing it and
- how it’s going to affect the people supporting you.
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More guitar-specific things next time around!
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Thanks for reading!
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-SC
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