Pricing

To Communicate or Not to Communicate – Price Changes

By Azeez Waheed
November 8, 2011

What Netflix could have done better… and how the banks did the right thing for once

WOW!! Another company finds out the hard way “what not to do when it comes to pricing”. Netflix took “bold” steps over the summer to divide their subscription servicesalong with the price hikes for these subscription services. Netflix went from one bundled subscription service to two distinct offerings:

 Streaming movies over the internet

Old-fashioned DVDs in the mail

And a price change from $9.99 for the original bundled service to $7.99 for each service or $15.98 for the new bundled subscription

What Netflix failed to do was communicate effectively:

Why were offerings and prices changing? What was the rationale?

o Pre-sold and communicated effectively, consumers can accept price increases.

o Poorly communicated, price increases feel sudden and capricious.

Netflix also failed to do their homework. How would customers feel about these pricing changes?

o Netflix took a huge misstep by not recognizing the emotional connection subscribers have to the red envelopes. Netflix assumed that most subscribers have high speed internet and would rather just stream movies than wait for the red envelopes.

Netflix presumed subscribers wouldn’t care or didn’t need to know the reason for a price hike; which was just afew more dollars than what they were already paying, Netflix sent out an email laying out the new services and prices without any explanation, this definitely came as a very cold and out of touch company.

Even when a close friend of Reed Hastings, the CEO of Netflix said “That is awful, I don’t want to deal with two accounts.” Mr. Hastings ignored the warning, believing that chief executives should generally discount what their friends say.

The same week Netflix’s folly was uncovered, major U.S. banks (Bank of America, J.P. Morgan Chase & Co. and Wells Fargo & Co.) were paying attention to their customers. Banks were testing the rise in prices for debit cards to offset their lost revenue and they discovered that consumers are highly sensitive to price changes right now given the current economic conditions where the 99% are watching how they spend their money. Based on consumer input the banks decided to not pursue their price hike especially since the whole “Occupy Wall St” movement is in full swing across the country.

The banks, in contrast, had communicated why they were planning on raising their prices: Banks noted the new fees were designed to offset lost revenue. Indeed, in response to new federal limits on debit card swipe fees, are expected to cost U.S. banks almost $6.6 billion a year in lost revenue, many banks have eliminated or scaled back debit-rewards programs, added monthly fees for checking accounts and raised minimum balance requirements. The banks tested out what they knew is a sensitive topic, and ultimately made a decision that will earn them some level of good will and customer loyalty.

Eventually, Netflix did away with the two product approach but still will not roll back its prices to $9.99. Netflix has lost customer loyalty and perhaps future/new subscribers at least in the short run in addition to over 800,000 customers who realized that there are other options for video rental besides Netflix aka ‘Netflixodus’.

The annual negative impact of  ‘Netflixodus’ has cost Netflix almost $96 M (800,000 customers X $9.99/month X 12 months). Conceivably, Netflix will be patient and heed to a close friend’s advice the next time they want to make a drastic change in their product offering.

 

– Azeez Waheed