So Netflix, the face of Internet-based access to video content (ie. tv and movies), has just stepped on a bit of a PR landmine - Netflix price hike angers users, some drop plan.
The problem with them hicking their prices (recession aside) is an age-old mistake that is more a PR mistake than anything else.
Here is what happens. Basic profit theory 101 (let's use a little math as an example)...
Original Pricing
You have 100 customers each subscribing to your service at say 10 dollars a month.
Total revenue per month = 1,000 dollars
You do an analysis as to what would happen if you raised the price and you estimate that you may lose a certain percetange of your customer base.
New Pricing
You lose 10% of your customers, leaving you with 90 customers
You raise your service pricing to 15 dollars a month
90 x 15 = 1,350 dollars
As you can see, having less customers at a higher monthly cost is more profitable.
Now, often times part of the analysis shows that while you will lose some of your existing customers, you will still be gaining new customers. So really, you won't even lose those 10 customers, because you'll replace them with new ones (who will be paying the higher monthly fee).
Business are always doing this, evaluating what the maximum they can charge for their product is without losing so much traction in the market that their revenues start to decline. The carriers are notorious for this, Rogers is always inching its prices up a little every year, sure they lose some customers, but many more simply accept higher costs for services.
The big mistake that a lot of businesses make, and NetFlix has just made this mistake, is not factoring in public opinion and brand equity (ie. PR).
Netflix was built on word-of-mouth. Internet-savvy users willing to go 'all-Internet' for their tv and movies, jumped on the NetFlix bandwagon and told everyone they should try it. In raising their prices, NetFlix has pissed these people off.
What they have now done is taken the portion of their customer base that were their brand champions and turned them in to brand wreckers. These folks will now attack the NetFlix brand and will champion another service should one be available.
In addition, let's be realistic here, NetFlix doesn't compare to getting content off BitTorrent or services like giganews - where every tv and movie is available (illegally mind you) for download for free. NetFlix was an offering for those folks that wanted to ditch the cable company but not engage in downloading things for free (ie. illegally).
So NetFlix customers do have other places to get their content, it's just a question of at what point do they get fed up with price hikes such that they start considering using services like BitTorrent?
What NetFlix failed to recognize is that the demographics that built their company up - customers willing to turn their backs on the cable companies who they felt were fleecing them - while they may only represent five per cent of the Netflix customer base (or whatever the actual number is) are also the same customers that will turn their back on NetFlix if they feel they are getting fleeced. The ramifications are serious damage to their brand.
The 'herd' customers - those customers that don't really know much about technology but rather follow trends or listen to their friends who tell them about a certain service - will follow the first-movers (ie. brand champions) where ever they end up going.
Any PR person will tell you that your service offering is critical, but just as critical is what people think of you. It's not enough to just be competitive, you must also align with the ideology of your customers. In NetFlix case, it's mostly people rebelling against the cable companies with their parasitic pricing structures.
Within this context, it's easy to see how behaving like the cable companies will alienate those who adopted your service in protest to the cable companies. The result over time will be erosion of your brand and ultimately a hesitation among customers (especially new ones) to sign up for your service.
The quotes within the article says it all:
"I can definitely afford it but I dropped them on principle," said Joe Turick, a technology engineer in Monroe, N.C., who has been with Netflix for about a decade, cancelled his subscription within an hour of learning of Tuesday's price changes and plans to try competitors.
----------
Zach Olsen, who is vice president of a public relations firm in San Francisco and has used Netflix for about five years, canceled his subscription on Tuesday after receiving an email from the company announcing the price hike.
"I was fired up. And I wanted to put my electronic foot down," Olsen said.
---------
Baker thinks the company should have offered a smaller price increase to long-time subscribers, saying, "it would have been nice if they showed some appreciation" to them.
"It makes you wonder if they really want to serve their customers or just their stock holders," Baker said.
So while NetFlix probably crunched the numbers and figured they could get away with a price hike, they failed to take in to consideration the PR ramifications. The result is they have seriously burned their brand equity in the market and opened a HUGE window of opportunity for their competitors to over take them.
While the decision in the short-term may be good for shareholders, in the long-run, it will hurt shareholders as their customer base shrinks.
Any PR person could have told you that this would happen given the demographics of their customer base. Rogers can get away with this stuff because most of their customers are either technologically ignorant or simply to lazy to try something new. But that is not the demographics of NetFlix customers.
What NetFlix should have done was leave their existing services as they were and simply layer on an enhanced service offering. That's the best way to build out your business, simply offer more to those willing to pay more. That doesn't hurt your brand because you aren't bending your existing customers over the proverbial barrel.
NetFlix probably evaluated this option and determined that there was more profit (short-term as it may be) in simply raising the price of their existing services. I wouldn't be surprised if the PR person told them this would be bad for their brand, but the sales and finance division probably won out (that's if PR ever had its voice heard at all).
If NetFlix were like the gas companies - ie. their customers had nowhere else to go - then they could have gotten away with this. But that's not the case. People, if pushed to the wall, will ultimately end up using BitTorrent (their moral opposition to downloading 'illegal' content will take a back seat to their frustration over getting fleeced by the market).
So bad on you NetFlix, you've dropped the PR ball big time on this. And while your sales forecasting may not show a marked decline in revenue from this move, the numbers you are working off of are likely not realistic because they do not factor in the impact of tarnishing your brand in the market.
The problem with them hicking their prices (recession aside) is an age-old mistake that is more a PR mistake than anything else.
Here is what happens. Basic profit theory 101 (let's use a little math as an example)...
Original Pricing
You have 100 customers each subscribing to your service at say 10 dollars a month.
Total revenue per month = 1,000 dollars
You do an analysis as to what would happen if you raised the price and you estimate that you may lose a certain percetange of your customer base.
New Pricing
You lose 10% of your customers, leaving you with 90 customers
You raise your service pricing to 15 dollars a month
90 x 15 = 1,350 dollars
As you can see, having less customers at a higher monthly cost is more profitable.
Now, often times part of the analysis shows that while you will lose some of your existing customers, you will still be gaining new customers. So really, you won't even lose those 10 customers, because you'll replace them with new ones (who will be paying the higher monthly fee).
Business are always doing this, evaluating what the maximum they can charge for their product is without losing so much traction in the market that their revenues start to decline. The carriers are notorious for this, Rogers is always inching its prices up a little every year, sure they lose some customers, but many more simply accept higher costs for services.
The big mistake that a lot of businesses make, and NetFlix has just made this mistake, is not factoring in public opinion and brand equity (ie. PR).
Netflix was built on word-of-mouth. Internet-savvy users willing to go 'all-Internet' for their tv and movies, jumped on the NetFlix bandwagon and told everyone they should try it. In raising their prices, NetFlix has pissed these people off.
What they have now done is taken the portion of their customer base that were their brand champions and turned them in to brand wreckers. These folks will now attack the NetFlix brand and will champion another service should one be available.
In addition, let's be realistic here, NetFlix doesn't compare to getting content off BitTorrent or services like giganews - where every tv and movie is available (illegally mind you) for download for free. NetFlix was an offering for those folks that wanted to ditch the cable company but not engage in downloading things for free (ie. illegally).
So NetFlix customers do have other places to get their content, it's just a question of at what point do they get fed up with price hikes such that they start considering using services like BitTorrent?
What NetFlix failed to recognize is that the demographics that built their company up - customers willing to turn their backs on the cable companies who they felt were fleecing them - while they may only represent five per cent of the Netflix customer base (or whatever the actual number is) are also the same customers that will turn their back on NetFlix if they feel they are getting fleeced. The ramifications are serious damage to their brand.
The 'herd' customers - those customers that don't really know much about technology but rather follow trends or listen to their friends who tell them about a certain service - will follow the first-movers (ie. brand champions) where ever they end up going.
Any PR person will tell you that your service offering is critical, but just as critical is what people think of you. It's not enough to just be competitive, you must also align with the ideology of your customers. In NetFlix case, it's mostly people rebelling against the cable companies with their parasitic pricing structures.
Within this context, it's easy to see how behaving like the cable companies will alienate those who adopted your service in protest to the cable companies. The result over time will be erosion of your brand and ultimately a hesitation among customers (especially new ones) to sign up for your service.
The quotes within the article says it all:
"I can definitely afford it but I dropped them on principle," said Joe Turick, a technology engineer in Monroe, N.C., who has been with Netflix for about a decade, cancelled his subscription within an hour of learning of Tuesday's price changes and plans to try competitors.
----------
Zach Olsen, who is vice president of a public relations firm in San Francisco and has used Netflix for about five years, canceled his subscription on Tuesday after receiving an email from the company announcing the price hike.
"I was fired up. And I wanted to put my electronic foot down," Olsen said.
---------
Baker thinks the company should have offered a smaller price increase to long-time subscribers, saying, "it would have been nice if they showed some appreciation" to them.
"It makes you wonder if they really want to serve their customers or just their stock holders," Baker said.
So while NetFlix probably crunched the numbers and figured they could get away with a price hike, they failed to take in to consideration the PR ramifications. The result is they have seriously burned their brand equity in the market and opened a HUGE window of opportunity for their competitors to over take them.
While the decision in the short-term may be good for shareholders, in the long-run, it will hurt shareholders as their customer base shrinks.
Any PR person could have told you that this would happen given the demographics of their customer base. Rogers can get away with this stuff because most of their customers are either technologically ignorant or simply to lazy to try something new. But that is not the demographics of NetFlix customers.
What NetFlix should have done was leave their existing services as they were and simply layer on an enhanced service offering. That's the best way to build out your business, simply offer more to those willing to pay more. That doesn't hurt your brand because you aren't bending your existing customers over the proverbial barrel.
NetFlix probably evaluated this option and determined that there was more profit (short-term as it may be) in simply raising the price of their existing services. I wouldn't be surprised if the PR person told them this would be bad for their brand, but the sales and finance division probably won out (that's if PR ever had its voice heard at all).
If NetFlix were like the gas companies - ie. their customers had nowhere else to go - then they could have gotten away with this. But that's not the case. People, if pushed to the wall, will ultimately end up using BitTorrent (their moral opposition to downloading 'illegal' content will take a back seat to their frustration over getting fleeced by the market).
So bad on you NetFlix, you've dropped the PR ball big time on this. And while your sales forecasting may not show a marked decline in revenue from this move, the numbers you are working off of are likely not realistic because they do not factor in the impact of tarnishing your brand in the market.
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