By Farah Lalani
Every day, millions of Americans look forward to the little red envelope in the mail. This envelope soon became branded as the famous Netflix DVD pouch. Early on, Netflix understood that consumers wanted convenience and became the pioneer of mail subscription model for DVD rentals.
Then, when media trends shifted and online streaming became popular, Netflix quickly integrated video streaming into its current model, without causing inconvenience or change to the consumers. A move happily welcomed by the consumers.
Netflix continued to bloom and focus its core strategy on growing a large streaming subscription business within the United States and globally. While staying within its operating margin targets, Netflix was able to improve its customer experience, enhance its user interface, and extend its streaming service to various Internet-connected devices. During its peak, the Netflix (NFLX) stock saw its high at a little over $304.
With the growing popularity of Internet-delivered content, Netflix realized that home entertainment trends suggest that DVD will become obsolete in the near future. Although it makes perfect business sense to focus on the profitable and blooming business of online streaming, Netflix focused solely on its core strategy and lost sight of the reason for its success.
Netflix’s success was highly dependable on customer satisfaction. Since 2005, Netflix has been named the number one retail website for customer satisfaction in 11 out of 12 surveys by ForeSee Results. In December 2010, the American Customer Satisfaction Index (ACSI) named Netflix the number one ecommerce company for customer satisfaction.
Influenced by its strategy to stay ahead of the game and taking its customer satisfaction results for granted, Netflix made a mistake. Well, not just one mistake, but a series of mistakes complemented with weak public relations.
In July, the company tested the loyalty of its subscribers by raising the price of its streaming and DVD bundle up by 60 percent. Big mistake, as Netflix does not hold substantial pricing power. Netflix’s business model leaves the company open to threats from competitors like Amazon (AMZN), Apple (AAPL) and Redbox, the $1 movie rental service owned by Coinstar (CSTR).
Then, Netflix made another costly mistake by assuming that the price hike will not lead to significant subscription losses. And, wrong it was. Netflix soon learned that it will sustain one million fewer customers than the company had originally estimated when planning for the hike.
Still hurt from the previous mistakes, Netflix acted in haste. Estimating the technology shift away from DVD too early, Netflix announced the separation of its DVD and streaming services into two businesses and two brands. While the streaming service will preserve the Netflix name, Qwikster will be the brand for the DVD service.
What’s wrong with the new brand? Apparently the new brand is named Qwikster because it refers to quick DVD delivery. Since when did snail mail become quicker than instant streaming? Moreover, an apparent marijuana and Elmo loving teenager owns the @qwikster twitter handle. Too late to change the company name now.
Aside from the Qwikster woes, the separation of its business has tarnished the identity that Netflix’s success was once built upon- customer satisfaction. Netflix differentiated itself from the competition by offering integrated DVD and online streaming experience. Now, Netflix has lost its competitive edge. The new Netflix model means separate websites, separate queues, separate credit card charges, and separate ratings systems- all presented at a much higher price to the consumers.
Added to its weak business model, Netflix suffers from bad public relations. Netflix’s decisions may not have been as severe, if it was communicated responsibly and timed strategically. Finally, after the fall of the Netflix stock, Netflix’s CEO was left with the most uncalled for mistake of all- a sorry letter.
“I messed up. I owe everyone 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…” – Reed Hastings, Co-Founder and CEO, Netflix.