The Value Cycle

In recent months, Netflix has gone from an industry leader (arguably an industry creator) to a cautionary tale. A company often cited for its outstanding concept, delivery, service, reputation, and management, Netflix changed the way we consume video content. Its effects on the video rental industry have been massive and obvious. Brick and mortar-based Blockbuster LLC filed for bankruptcy in 2010 after record losses and was soon purchased by Dish Network, which has revamped the brand and moved toward streaming video, DVDs by mail, and kiosk rentals to compete with both Netflix and kiosk-based Redbox. While the demise of the local video store cannot be entirely attributed to Netflix’s popularity, there’s a significant correlation. Who wants to go to a store, sort through a limited collection of movies, and pay $4 per three-day rental instead of sitting on a couch browsing thousands of titles that can be streamed instantly to a TV, computer, or iPad?

Well known for their free trials and savvy marketing, in addition to a great product and even better service, it seemed consumer-friendly Netflix could do no wrong. Until they did. Having captured more than their market share, it appears that Netflix simply got greedy. They increased their rates and separated DVDs by mail into a stand-alone service (read: additional charge on top of price increase for streaming) under a new brand called Qwikster. The summer 2011 change took long-time subscribers by surprise, and a botched attempt at damage control made things even worse. The result? An estimated one million subscriptions canceled and plummeting stocks. Not to mention the incalculable damage to their once enviable brand and customer loyalty rates.

What Can We Learn From Netflix?
Netflix made some serious missteps, many of which could have been avoided had Netflix made a concerted effort to actively listen to and value their clientele. Yes, there’s certainly more to it than that in some ways, but the bottom line is, when companies actively value their clients, clients value the companies. And that value cycle is something successful companies leverage to their advantage.

For small business owners, there are a few lessons to learn here:

1. Value your existing clients. The biggest mistake Netflix made, by far, was not raising their prices, but showing a disregard for their existing customers by failing to listen to them and value their opinions. By engaging customers, employing customer champions, listening to consumers’ concerns, and actively data mining to maintain the integrity of your brand, you can provide yourself with a bit of a reality check before making big changes. Does the change make sense internally? Sure. But how will it look from the outside?

2. Reward loyal customers. Had Netflix grandfathered in existing rates for their loyal customers, it’s unlikely their price increase would have caused much strife. After all, it’s still an affordable and reasonably priced service, even after the rate hike. Rather than inflicting a sudden and (percentage-wise) large rate increase on your clients or discontinuing a product with no warning, communicate with your customers. Give them advanced notice, special incentives to stay on, and other rewards to demonstrate that you value their loyalty and patronage. And remember, attracting new customers typically costs five to ten times as much as keeping existing ones. So, retaining customers through loyalty rewards often actually saves you money in the long run.

3. Leverage your brand wisely. Netflix decided to separate DVDs by mail from their streaming service with an individual charge for each. This enables them to quote a lower price for their streaming service than they would have to if everything remained in one package. It sounds better: “Only $7.99/ month for unlimited streaming!” But consumers don’t see it that way. They see that they’ve lost DVDs by mail unless they pay an additional charge, and they’re annoyed. Plus, the new DVD by mail service is called Qwikster, a name with zero brand recognition. Now, customers are not only annoyed at the additional service charge, but they’re adjusting to an entirely new brand, one to which they have no loyalty.
Had Netflix leveraged the popularity of their brand name by retaining it in some form for the DVD by mail service, at least the provider would have remained easily recognizable to consumers. Just as with valuing clients (above), it’s important to recognize when your brand (your name, image, reputation) is an asset and leverage that popularity when rolling out a new product so consumers make a positive connection and have favorable expectations.

What are you doing to build a strong value cycle within your organization? How do you listen to, show respect for, and reward your client base? Are you getting maximum mileage out of your branding efforts when you roll out new offerings? We can help you figure it out.