Netflix Apology May Have Come Too Late By: Elliot S. Schreiber, Ph.D. Tel: (302) 381-6209 Email Dr. Schreiber Website: www.brandandreputation.com

I wrote a blog last July about Netflix and their attempt to move customers away from DVD rentals and toward on-line streaming. It was a good strategy with bad execution. That is, the DVD rental business was costing too much money, but the way they attempted to change behaviors was ludicrous. Later in the month, I noted that Netflix had stumbled further due to poor communications.

The issue, as most readers will remember, is that Netflix announced a 60% price increase on DVD rentals. It decided to use pricing to move customers to a behavior they desired more. It was an incredibly stupid move. One should not punish customers, especially loyal ones, but rather incentivize them to change. The aggressive pricing model employed by Netflix doesn't work, particularly when there are alternative offerings. It reminds one of the way a monopoly might act. Customers have other ways of getting videos. Netflix banked too heavily on its brand equity and lost. Customers left in droves. In fact, it is estimated that some 1 million customers left Netflix. Not only that, but the move damaged its reputation, creating a cadre of people on line speaking out against Netflix. Loyal customers are often very involved in the brand. When the relationship is damaged, they can turn on the company with the same passion.

Now, Netflix has announced that it is splitting its business into two. The DVD-by-mail business will be called Quikster, while the online streaming will continue to be known as Netflix. The problem continues, however. The name Quikster is already owned by someone that uses it as his Twitter handle. Also, the DVD business was strongly idenitied by the red envelope and the Netflix brand name. This was not well thought out. It seems like a rush decision and makes one wonder about the management prowess at Netflix. Reed Hastings had built the business with impressive precission. He mailed DVDs to himself from around the country to determine how long delivery took, he arranged drop-sites throughout the country to cut the time, he branded the red envelop, developed an amazing algorithm for recommendations, etc. To make so many mistakes now almost seems like a different company and different leader. Who is minding this store?

Hastings wrote a lengthy letter of apology to customers and posted a video that said, "I messed up". He indicated that the company may have become too arrogant. You think?? Well, Mr. Hastings, you sure did mess up. You not only drove customers away, but you then waited two months-a lifetime in such a situation-- to respond, causing a growing number of formerly loyal Netflix customers to turn on the company and start advocating against it. One has to wonder what finally got Hastings to apologize. This was not just arrogance, but a total disregard for customers and the power of customers who own the brand relationship. Customers made Netflix and they can destroy it.

This is a breakdown not only of strategy, but also of communications. Netflix had a very high level of perceived value. It helped cause the demise of Blockbuster. Perhaps by bringing down "Goliath", Hastings and the gang at Netflix began to think a bit too highly of themselves. They seemed to assume that they had won the market and that they could maneuver customers around. It just doesn't work like that. Once a company takes customers for granted, they are in serious trouble. There are two things that damage perceived value - design flaws and bad communications. Design flaws can be in products or services. The flaws can also be in strategy. Another example of a company with both design and communications flaws is HP, which not only had a flawed strategy, but communicated it poorly.

In the weeks following the initial price increase, Hastings showed his arrogance. He declared that he knew customers would be angry and that he was surprised even more were not screaming about the price increases. That is not the type of attitude that portends for a healthy relationship with customers.

Here's what others can learn from Netflix:

1. They built their brand on the basis of better movie offerings to satisfy niche interests and their recommendation algorithm. Online streaming eroded the first part of the brand, but did not replicate the algorithm, which is similar to the one used by Amazon to make recommendations based upon previous purchases or others who liked similar brands. They could have used these brand attributes to provide an incentive for customers to move away from costly DVD rentals. Instead, Netflix thought it could force customers to move. Bad decision.
2. Many companies confused customer satisfaction with loyalty. Never take customers for granted. Customers may be satisfied, but will leave if there is a better offering. Netflix attracted customers quickly and the company became the leading brand for movie rentals. Customer acquisition is great, but one has to make certain that they retain those customers. The price increase last July seemed to suggest that Netflix thought it had loyal customers who would stay with them regardless of the action it took, or that it could cull those customers too expensive to keep. Netflix drove customers away and created negative advocates - that is, those who turned on the company.
3. When technology changes, not all customers will change quickly. Many of the customers that came to Netflix came because of its DVD mail-order business. That is what made Netflix great. Technology changed and the DVD business became expensive to Netflix. They wanted to move customers to streaming. However, many of the Netflix customers are not "streaming literate". They should have helped them move slowly. Instead, they punished them with price increases. The message was that Netflix didn't need these people anymore. Terrible decision and move!
4. Every company must focus on its perceived value throughout its life cycle. Just because there is high brand equity and loyalty at one point does not mean things will continue that way. Competitors will always attack those who are in the lead.
5. Strategy cannot be changed on a whim. Companies cannot make decisions about pricing, branding, and segmentation without involving customers. We live in a new world. I would have thought that Netflix, a Silicon Valley company, would have understood that.

Reed Hastings is right to apologize to customers. He has made incredibly bad moves that showed a lack of customer appreciation and an arrogance that one often finds in start-ups. Netflix needed to show some maturity and did not. We will see how badly the brand has been damaged. The stock price is down, and millions of customers have left. But, Netflix continues to stick by its earnings guidance. Seems like they still have that arrogance thing down pat!

Other companies have done stupid things and survived. Netflix needs to change its behavior quickly, step back and reengage with its customers and talk to them about the direction it plans to take. If Netflix is to not just survive, but also prosper, it needs to involve its customers in its future, because customers are involved already and they are unraveling that future.

What do you think about the way that Netflix has handled itself as of late? Is it going to be permanently damaging to their brand?