Do Price Research To Avoid a Netflix-Like Mess

You have probably heard about customer discontent with Netflix’s latest price increase and separation of services. The company expects to lose about 1 million subscribers by the end of Q3 2011 due to the price changes. On 9/16, the WSJ reported that the stock was down 44% ($169.25) from an all-time high in July ($304.79). I still remember 4 years ago when the stock was $18. It is still high, but the decline is significant.

The decision was driven by Hasting’s vision about the future where video streaming should dominate, but he seems to have ignored the present forcing an experience on its customers that they were not ready for yet. He admits a certain arrogance based on past successes. It is a pity he has fallen into the same trap that other companies that get too big and overconfident. He should learn from competitors’ mistakes that at one point were considered too big to fail.

In none of his comments and late apologies, he made any reference to customer research and feedback so I assume this was absent or if done, totally ignored.

As a former Director of Research at Blockbuster Online, a direct competitor of Netflix, I can testify that our team knew better than changing the customer experience and prices without doing research. Of course, there were other factors influencing pricing decisions, but customer feedback was the most important by far.

Never forget how a price change may affect customer perceptions and ultimately their experience with your service. In this case, Netflix users not only got higher prices but also more work to do. Those who want both DVD and streaming video content have now to manage two accounts.

If Netflix had done some basic research it would have come obvious that people want simple solutions, not more things to do. This was actually one of the drivers that led us to develop Blockbuster Total Access, as a service in which we combined the online and store experience in one. By the way, Blockbuster has been quick to offer a 30-day free trial of this service. I got this flyer in the mail today.

As for pricing, there are several approaches you can use in pricing research, but measuring willingness to pay is tricky and asking questions in a realistic context is key to get accurate results.

At Blockbuster Online we often used conjoint analysis, which gave us insights into customer experience and perceptions regarding the value of different service features in relation to their price through the trade-offs they were willing to make (e.g. number of DVDs at a time vs. price) taking into account other competing alternatives for watching movies in the market (e.g. video rental stores, video on demand, movie TV channels, Hulu, and even Netflix, etc.).

This approach proved to be invaluable then and continues to be so for many of my clients across industries. Although, the conjoint analysis may be impractical in some circumstances (depending on the competitor landscape, product or service features or simply budget), the lesson here is to do research before making pricing decisions, and while you at it don’t forget the implications for customer experience. No approach is perfect, but they may prevent you from creating a Netflix-like pricing and customer experience mess.

Update 10/10/2011: It seems that Netflix learned its lesson the hard way and now reversed its decision to split the DVD rental and video streaming services in two after the strong customer reaction. A little research could have saved Hasting all this headache and would have prevented Netflix from losing subscribers and revenue.

To learn about other pricing research methods check our Product and Price Research services.