Five lessons small businesses can learn from the Netflix pricing debacle

United States-based movie rental giant Netflix has suffered another blow to its share price overnight after the company published an apology for its recent price hike and announced a new plan to split its DVD business into a completely separate entity.

But the new announcement has been met with even more disdain, with thousands of negative comments published on both Twitter and Facebook criticising the move which will make it harder for customers to manage their DVD titles.

Netflix shares have fallen 7% overnight to $US143.75. Over the past two months, the company – which many believed to be one of the most successful tech companies of the past few years – has seen its value halved.

Chief executive Reed Hastings published an apology, referring to the new price scheme the company introduced in July that would make it more expensive for users to both stream movies over the internet and rent them via mail-order DVDs.

“It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes,” he said. “That was certainly not our intent, and I offer my sincere apology.”

He also announced that the DVD service would now be split off into a separate entity, which will operate as a wholly owned subsidiary of Netflix.

But the backlash has already begun, with thousands of customers complaining on Twitter, Facebook and blogs that this will make it harder for them to manage their film queues, which organise which films they rent next. Analysts have also criticised the move, with some saying the company appears to be panicking.

The entire attempt to raise prices and stifle the subsequent backlash is a mess. Here are five lessons businesses can learn from the Netflix debacle:

Be aware of your market position

With its original prices, Netflix was practically the only choice for consumers to stream and rent movies – everything else was too expensive.

Now, that choice isn’t so clear. Consumers may want to rent some films from Blockbuster, source some alternative streaming deals like RedBox, and check out some premium cable channels such as HBO.

In fact, Blockbuster even took the opportunity to slam Netflix while it was down, opening a pop-up box on its front page saying “Netflix raised your prices by 60%”, offering a free trial to consumers.

The perception of the value you offer consumers will change once your prices do. Be aware of your market position before you make any significant changes.

Don’t shock customers with a price increase

Occasionally, businesses need to raise prices. It’s simple business and needs to be done. But Netflix arguably handled its original announcement in the worst way possible – without much warning or explanation at all.

The original blog post detailing the changes provided some information on how the new system would work and why it was being done, but little else. There appeared to be no foreshadowing that customers would react harshly to the change, one of the biggest in the company’s history, nor were customers given much warning – for new members, the changes happened immediately.

It begs the question – did Netflix do any market research before announcing the changes? Why didn’t it offer a grandfather arrangement, where loyal customers would see price increases come in over a 12 month period?

Businesses often change prices, but consumers need to be informed in the best way possible. A short blog post, (which received thousands of negative comments), with no further explanation is not the best way to do so.

Provide a perception of value

Many businesses will provide a product or service where if a customer buys two of the same product, they receive a discount. Netflix not only raised prices, but forced consumers to pay $US7.99 for a DVD service, and $US7.99 for a streaming service.

In an economy that is performing badly and unemployment at 9.1%, customers want value. Making them pay a higher price for the same product they’ve been used to at a cheaper rate turns them away.

The global economy is fragile – customers want value. Even if businesses are forced to raise prices, they need to understand that consumers are always eager for a good deal.

Don’t complicate your experiences

Splitting Netflix into two entities might make sense if the two businesses were already separated, and if they were managed by divisions that didn’t have anything to do with each other. Right now this isn’t the case.

Under the current structure Netflix users can manage their queue despite hiring both DVDs and streaming online. Now, they’ll have to visit two different websites to manage the entire process.

Already the backlash has been huge – users want to be able to use both services easily. Although Netflix might argue it’s attempting to phase out physical DVD rentals, this isn’t the best way to do it and has already seen customers cry out in protest.

Splitting products isn’t always the best course of action, especially if it’s going to make customers more confused.

Always check your Twitter name

After Netflix announced it would spin off the DVD business into a new entity, consumers immediately flocked to the URL and various social media sites to see if the company had done its homework – and it hadn’t.

The Qwikster Twitter profile doesn’t belong to the company. It belongs to a young man by the name of Jason Castillo whose updates have nothing to do with film rentals.

And while Castillo has received a few thousand more followers and some monetary offers for his Twitter handle, this isn’t a situation that any business should find themselves in. It insinuates Netflix hastily came up with a name and didn’t do the necessary homework before launching.

Establishing your social networking presence is critical – just as critical as registering a URL or trademark. Make sure you register your own Twitter handles before you get caught unawares.