Netflix Admits Customers Will Leave, Draws Fire; Is Transparency to Blame?



Brian Cantor
07/28/2011

In the wake of its price hike, Netflix has been unable to catch a break in the customer satisfaction game.

First, the company was ripped for what critics alleged was a fairly-unexpected, weakly-justified announcement that it would be requiring customers to purchase separate subscriptions for the DVD and streaming services, resulting in as much as a 60% price increase for those subscribers who are currently bundling both.

In the days that followed, Netflix failed to offer what pundits felt was an appropriately-comprehensive response, and the outcry only heightened. Cries of "betrayal," accusations of arrogance, attention to customer unhappiness and calls for competitors to prey on Netflix’s trouble greatly overshadowed news of customer-friendly developments on the content licensing front.

Most recently, Netflix addressed the price increase in its quarterly earnings announcement, and the response was again negative. In the letter to investors that accompanied the quarterly statement, Netflix readily admitted that "some subscribers will cancel Netflix or downgrade their Netflix plans," before forecasting that subscriber growth in the third quarter, during which the price increase takes effect, will be down year-to-year.

The subscriber forecast was included in what investors perceived as a disappointing quarterly statement, and Netflix’s share price fell in the aftermath.

What could be good for business might not be good for customers

The disappointment, however, was not limited to those with a financial stake in the company. Because the letter was to investors and not simply a "feel good" fluff piece for enraged customers, Netflix also had to speak positively on its financial health.

That meant using lines like "we expect most to stay with us because each of our $7.99 plans is an incredible value," which again raised questions about Netflix’s sensitivity to customer concerns. Portraying confidence to investors is paramount, but commentators also wanted to see acknowledgement that its customers were owed a detailed explanation. Regardless of whether $15.98 is a fair value for the combined services, they had previously been valued at $10, so many customers were interested in Netflix’s plans to make a 60% improvement (minus inflation) in the value of the product.

Netflix’s cavalier approach to the issue seemed noteworthy. It readily admitted it would lose customers as a result of the price increase, and yet it provided no clear details on how it would fight to keep these disgruntled customers from leaving, nor did it explain, beyond a general commitment to content licensing and consistent operating margins, how it will improve the sentiment of its current subscribers once the price increase takes effect.

Even more notably, the company boasted about the impact the price increase will have on revenue once it fully takes effect. Forecasting subscription growth to get back on pace in Q4, Netflix bragged that the "revenue will reflect a full quarter’s impact of the pricing changes, which could result in Q4 being our first billion dollar global revenue quarter."

Essentially, Netflix was saying that the financial reward of the price increase on existing and newly-acquired subscribers would more than offset the loss of disgruntled ones. Albeit an investor-friendly message, it is not one that aligns with the "every customer is our most important customer" philosophy that many buyers want to believe is the case.

The reaction to Netflix’s letter to investors brings attention to a dilemma that has increasingly developed as online and social channels have given customers more insight into their favorite brands.

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Who is "transparency" designed to benefit?

Transparency, ironically the quality some pundits argued was lacking from Netflix’s price announcement, in fact weakened Netflix’s message since it had to openly sell value of the news to its investors amid hostility from customers.

Since investors are looking at dollars-and-cents results, the appropriate, transparent response from a business standpoint could, in fact, appear insensitive to qualitative customer concerns. It definitely did here.

Netflix might not have anticipated quite so heated a reaction, but it had to have realized that some customers would complain about a jump in price. And yet it believed its decision, whether out of absolute necessity (as recent reports on licensing fees suggest) or hunger for more revenue, was ultimately the right one for business. It openly conveyed the business implications to its investors.

That kind of strategizing, assuming it does, in fact, pay off, is what the business of Netflix needs to be accomplishing. It is what the market needs to hear in order to maintain faith in the brand.

But with each transparent, public statement reassuring investors of its commitment to growth and the intelligence of its strategies, Netflix risks further enraging those customers who already felt betrayed by the decisions.

The rise of brand transparency and online, social engagements between companies and their customers is often lauded for "humanizing" business and allowing customers to sense honest corporate appreciation for their needs.

As demonstrated by the Netflix example, however, it can also serve to remind customers that brands are, at the end of the day, businesses that need to put financial interests first.

But can Netflix get off that easy?

The fact that Netflix not only has to act in its investors’ best interests but also highlight that focus in its transparent statements can indeed explain why the company stood behind its pricing decision.

It does not, however, mean customers are wrong for seeking a detailed explanation from Netflix about how improvements in its product’s value will correspond with the price hike.

Netflix’s statement to investors revealed that it saw the loss of some customers as necessary collateral damage of the new strategy, but it did not say that Netflix’s philosophy going forward would be to ignore customer concerns nor that the value of its offerings no longer needs to be marketed (it, in fact, identified plans to more heavily market some of its services, and it confirmed that it hates upsetting customers).

Even if the business is growing, if there are previous—and potential—customers whose dissatisfaction with Netflix’s handling of the price increase or lack of appreciation for the value is standing in the way of purchasing, Netflix is possibly leaving business opportunities unturned.

Responding to these concerns in attempt to seize the opportunity will often make sense to investors and customers.

This article evaluates recent news regarding Netflix's customer service. Any references to the company's stock performance are purely for information purposes. This article provides no advice regarding investing in Netflix, nor should conclusions about its financial health be derived.

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