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(originally published by Booz & Company)


Netflix Wasn’t All Wrong

Of course, nobody likes a price increase, and even after the company finally adjusted its pricing model, there was still a lot of noise from the customer base. But, as the dust settles, it has turned out that Netflix lost less than 5 percent of its customers (800,000 out of a subscriber base of nearly 24 million). Adjusting its pricing was the right decision, and the company has notably stuck by that decision.

Brand management. The company really didn’t think this through. Netflix chose to make explicit the distinction between its two business models by giving them separate brands — Qwikster for the original by-mail business and Netflix for the new streaming business — and requiring separate unlinked accounts. This was a tricky and unfortunate decision.

Netflix had built its brand on being an innovative, consumer-centric company that revolutionized the way movies were rented. It allowed people to move from the inconvenient bricks-and-mortar chain store model to one with online, assisted selection; home delivery of DVDs in an iconic red envelope; and, most importantly, no returns, no late fees, and no “library fine”–style guilt. The brand was built on those attributes, and it engendered significant loyalty among its subscriber base. The decision to change the original business brand name to Qwikster in one fell swoop was apparently based on the premise that the Netflix brand would be more valuable in the newer streaming space. But it was a misstep. The equally swift reversal of the decision might have controlled some of the damage, but there has probably been some permanent dilution of brand equity. In retrospect, it would have been wiser to find a way to brand both services as Netflix, or if a new brand was necessary, to apply it to the new service.

Communications. Where do we start? After charting an unerring path for so long with consumers, it was surprising to see Netflix make so many fundamental mistakes on the communications front.

Some will say that Netflix got its strategy wrong. Others will say the strategy was right but poorly implemented. Ultimately, the distinction doesn’t matter; missteps of this magnitude become strategic issues.

In the meantime, the Netflix debacle offers some important lessons for strategists. First, timing is sometimes the hardest part of strategy to get right. Netflix likely judged correctly that its mail business was going to be cannibalized and ultimately replaced by streaming. But no one can really know for sure how fast that might happen. Moving too early can be disastrous, as Netflix learned, but moving too late can be even worse — as companies such as Kodak, Research in Motion, and Nokia have discovered. Another aspect of timing, the speed of change, is also difficult to master. Netflix sprang its new service on its customers too abruptly. People need time to adjust.

Second, strategy should be based on how customers behave, not on what they say. Before Netflix announced its change, customers had posted many online messages about the value of switching to streaming. But talk is cheap. Netflix learned this when it began to implement the change, asking customers to switch to a new account if they wanted their videos by streaming instead of mail — and then customers balked.

Third, when customers have an intense loyalty to a particular product (or service or brand), they become nearly as vested in the product as the company is. Coca-Cola Company learned this lesson the hard way in 1985, when it replaced its original flagship cola with a new cola. Many of Coke’s most loyal consumers were outraged by its unilateral decision to take away “their” product. Likewise, Netflix’s customers were outraged when the company took the Netflix name away from “their” original mail service.

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