Netflix Shows How NOT to Raise Your Price

Last Updated Jul 27, 2011 8:29 AM EDT

Netflix recently took a huge publicity hit -- and got its stock clobbered -- for raising its prices. The rise in price turned into a debacle because Netflix broke EVERY rule about raising prices. Here are the rules, so that you don't make the same mistake:
  • RULE #1. No surprises. The moment you know you're going to have to raise your price, you need to signal to your customer base that a rise in price is likely to take place. By contrast, Netflix sprung the price rise as a sudden announcement, compounding their customer's irritation into ire.
  • RULE #2: Explain why. If you explain that your costs have gone up and that you therefore must raise your own prices, customers will understand. Customers aren't stupid. They "get" that costs must be passed along. By contrast, Netflix barely explained anything, making it seems like they're were only gouging customers for more profit.
  • RULE #3: Make it gradual. A series of small price increases, initiated over a long period time is far less likely to make customers angry, especially if you're following rules #1 and #2. In fact, many may not even notice, By contrast, Netflix sprang a huge price increase all at one time.
  • RULE #4: Add some value. Every price increase should have at least SOME added value, above and beyond the passing along of costs. The added value need not be equal to the increase, but it should be there. Netflix should have announced something like a spate of new streaming movies or shows.
  • RULE #5: Grandfather possible defectors. If you've got customers who have been with you a long time, but have a profile that suggests they might jump to a competitor, it make sense to keep them at the old price, providing it's still profitable. Netflix pretty much lumped everyone into one pot.
If Netflix had followed these rules, there would have been no bad press, no angry customers, and no hit on the stock. The price increases would have rolled out gradually, and nobody would have noticed.

Why didn't they do so? Arrogance and stupidity. Netflix CEO Reed Hastings thinks his company is so well positioned that he can do anything he wants and people will still use the system. Apparently he isn't aware that the streaming part of his business model is TRIVIAL to imitate.

Prediction: Netflix will be the Myspace of streaming video, because they'll keep showing this kind of arrogance, which will lose them loyalty and make them vulnerable.