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October 13, 2011

Don’t Scare Your Customers: What We Can Learn from the NetFlix Boondoogle
Filed under: Public Relations — Tags: — nedpelger

I love innovation, but have learned to be careful with how I introduce it to my customers. Any construction project usually costs our customers big money. So our customers tend to be a bit anxious when dealing with us. Then the reality of how many projects over-run costs and schedules (and have quality or safety problems) and it makes sense that our customers should be cautious about construction spending.

So we want to innovate, but we want to not scare our customers in the process. We need to think about the changes we plan to institute from our customer’s point of view. NetFlix provides a great bad example.

In case you don’t know the back story, NetFlix has had the golden touch in video distribution. By providing low cost rentals through the mail and online streaming, they helped shutter many video rental stores and put a big dent in the DVD sales numbers. They had millions of loyal customers who liked their process.

They decided to raise prices and screw around with their customer’s options. Within a month, the regular growth of NetFlix turned to a mass exodus. The founder and CEO sent me this message:

“Dear Ned,

I messed up. I owe you an explanation.

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. That was certainly not our intent, and I offer my sincere apology. Let me explain what we are doing.

For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us). So we moved quickly into streaming, but I should have personally given you a full explanation of why we are splitting the services and thereby increasing prices. It wouldn’t have changed the price increase, but it would have been the right thing to do.

So here is what we are doing and why.

Many members love our DVD service, as I do, because nearly every movie ever made is published on DVD. DVD is a great option for those who want the huge and comprehensive selection of movies.

I also love our streaming service because it is integrated into my TV, and I can watch anytime I want. The benefits of our streaming service are really quite different from the benefits of DVD by mail. We need to focus on rapid improvement as streaming technology and the market evolves, without maintaining compatibility with our DVD by mail service.

So we realized that streaming and DVD by mail are really becoming two different businesses, with very different cost structures, that need to be marketed differently, and we need to let each grow and operate independently.”

He went on to say that they started a new company called Qwikster and that most of their customers will get shunted to this new company. Now most customers don’t like the idea of being shunted, especially without being consulted. So a lot more customers left, then this email came, not from the CEO but from the NetFlix team:

“It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs.

This means no change: one website, one account, one password…in other words, no Qwikster.”

The take-away from the NetFlix saga? Think deeply about how your customers will respond to changes and innovations. In even simpler terms: Don’t take your customers for granted. They do have other options.