Netflix Price Increase Severely Damages Customer Relationships

by Nichole

On July 12th, 2011 Netflix emailed customers and posted on their blog that they are introducing new pricing plans. Any time a company posts publicly about changing their prices it can be a touchy subject that is ripe for turning into a communications crisis. Unfortunately, that is exactly what happened to Netflix.

Netflix Price Increase Email “Our 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.

The price for getting both of these plans will be $15.98 a month ($7.99 + $7.99). For new members, these changes are effective immediately; for existing members, the new pricing will start for charges on or after September 1, 2011.”

Basically, they have raised the price $5.99 a month to have both services and they are applying the new pricing to ALL current customers.

I’m honestly baffled, how could Netflix not predict that customers were going to be outraged by this increase? Their streaming library doesn’t even include the latest videos that are available on DVD and is limited at best. The language in their email is quite frankly a little condescending. It comes across as “hey, we’re raising your plan price and there is nothing you can do about it.”

 And then there is this line at the end.

“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.”

Really? So you are essentially encouraging me to cancel my plan after ticking me off with your condescending email. Naturally, I was a little miffed after receiving the email and started to look around and see what other people were saying.

That is when I just started to feel bad for Netflix. They clearly messed up and weren’t prepared for the backlash that was ensuing around them.  

This is one of the nicer of the comments I found about how customers are feeling about the change. It is important to note that Netflix has NOT responded to a single comment on their blog and there are accusations that they actually turned off comments for a period of time.

What could Netflix have done differently?

Showed that they valued customer loyalty

The thing that is clearly upsetting customers is that there was no acknowledgement of the years of loyalty they have shown to Netflix. Instead they provide this cheesy blanket statement thanking us for our business.

“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.”

It feels disingenuous and doesn’t feel like they really appreciate MY business in a personalized way. I have been a customer since June 2009, so essentially right after my 2 year anniversary you have increased my prices. And I’m kind of a newbie for them; there are a whole lot of customers who have been with them for over a decade.

Netflix Price Increase BacklashIf I were Netflix, I would have grandfathered in all existing customers for a specified period of time that is calculated based upon how long they have been a Netflix customer and said something like, “to thank you for your loyalty we are extending a 6-month price freeze on your account which will allow you to continue at your existing service plan for the same price you have enjoyed for the last 2 years. We hope that you will continue to enjoy your Netflix services and see the value it brings to your home. On X date, your service will be rolled over to the new plan pricing if you choose not to change your subscription options.”

This personalized thank you message shows your customer that you understand the value they bring to your organization and are willing to go above and beyond to make sure they know you appreciate them.

Prepared for negative backlash

It is quite possible that even if customers were given an extension there still would have been outcry. However, a crisis management strategy should have been developed for questions and comments like:

  • “This sucks. I’m cancelling.”
  • “How can you increase prices during these economic times?”
  • “Your streaming library doesn’t have the same videos as your DVD library, why is it worth the extra money?”
  • “Why are you increasing your prices?”

The biggest mistake Netflix has made is not responding to any of the comments posted on their blog, Facebook, and Twitter. Apparently, they think ducking and hiding is the best way to make it “die down.” Unfortunately, every comment that is being posted using a social profile is being shared with their network. The average Facebook user has 130 friends  and the post has generated almost 3,500 Facebook comments and 5,000 blog comments as of the time of this post. And that’s just on the blog, there are over 16,000 comments on their Facebook page. Further, it appears that they shut down blog comments for about an hour after the negativity starting pouring in, which caused more backlash and there are claims that they are deleting comments and paying for people to hit the like button. Just for Facebook it is a potential reach of 2.5 million people not including those who are seeing the massive amounts of “likes” the comments are receiving or what’s being shared on Twitter. I can’t even count the amount of people who have simply posted saying they are cancelling their plans. The loss of business combined with the negative perception of taking advantage of customers is going to take a long time to overcome.

Provided an explanation for the increase

The explanation provided makes it sound like there is this great demand for a DVD only plan which quite frankly sounds like a bold faced lie designed to increase revenues from a channel they have decided is worth more money or is costing them more to operate.

“Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs.”

They should be honest about why they are making this switch. Is it because they are losing money due to the unexpected usage on the DVD side? Is it because revenues have suffered as a result of the economy and they can’t operate at their current rates?

Let’s be honest, there isn’t a substantial amount of overhead on their streaming side once the video has been added to the library and royalties have been paid, so it’s kind of hard to say that they are only making $2 for the DVD side. That is simply how they chose to position the pricing. The reality is that it probably is a reverse situation where they are charging $2 for streaming and $7.99 for the actual DVD fulfillment.

Either way, honesty and transparency into why they are making the change could have prevented some of the back lash. While I may not have liked the change, I could have at least respected the fact that they are a business and need to make money to keep their doors open.

So How Much Will This Blunder Cost Netflix?

I think Netflix will see a large fall off from their existing customer base. For myself, at a minimum I’m going to downgrade my account to the streaming only option which will result in $2 a month less in revenue for them each month and I’m considering switching to Zune. I use Vudu to stream new movies and they are more convenient than waiting for a Netflix DVD and always have the movies I want. Consumers have choice of providers between Hulu, Zune, CinemaNow, Blockbuster, Roku , Redbox and cable onDemand libraries so this was probably not the best time in the market place to push Netflix customers to start considering other options.

If we do some simple math we can arrive at a potential cost to Netflix. There are 8500 comments on the blog alone and I have found 1 positive comment, yes 1. If half of the people just from the blog actually cancelled as they say they will and the average plan is $9.99 a month that is a potential loss of $42,457 in revenue every month or essentially over $500k a year. That’s just a guess based on the blog and doesn’t consider the effect this will have on Netflix stock or cancellations from Facebook or Twitter feedback. There is likely a substantial increase in fall out from those who simply read the email or the blog and cancelled without saying anything.

And Now to the Big Question…What Should Netflix Do Now?

  • Apologize – First and foremost, Netflix owes their customers an apology. They should apologize for not providing the opportunity for customer feedback prior to the change and for not responding to the feedback after the change was made.
  • Be Transparent – Provide an honest explanation to customers stating why the change was made and how it will provide value to them in the long run. They should release a public statement explaining their actions, preferably a video from an executive with a written transcript for their website. The video should show empathy and understanding for their customer’s frustration.
  • Retreat – The only thing they can do to save face at this point is to roll-back the pricing changes for existing customers for some period of time or increase their service level at the new price, for example adding free Blue-Ray for 6 months at the new price. They will likely still lose some customers, but hopefully this gesture will be enough for some of the unhappy customers to stay.

What do you think about Netflix’s response? What could they have done differently? How do you think they should handle it at this point? Please share your thoughts in the comments section.

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About Nichole

Nichole

Nichole Kelly is the President of SME Digital, the digital marketing division of Social Media Explorer. We are the digital marketing agency that understands your bottom line. Her team helps companies figure out where social media fits and then helps execute the recommended strategy across the “right” mix of social media channels. They use a scalable content approach and measures the results to your bottom line. Do you want to rock the awesome with your digital marketing strategy? Contact Nichole

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