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Netflix: Still Clueless About Its Customers

It's totally understandable if you're dizzy trying to follow Netflix's (NFLX) business strategy. It's creating a new DVD division! It's raising prices! It's dodging tomatoes hurled by angry customers! It's changing its mind! Again!

"We underestimated the appeal of the single web site and a single service," a Netflix spokesperson said to the New York Times. No, what the company underestimated was the need to both understand customers and still build a coherent strategy on more than popularity polls.

You mean we have customers?
Netflix knew that it had to raise prices. Ever increasing demands from Hollywood studios made that a foregone conclusion if the company wanted to stay in business.

This sort of thing happens. But in its announcement of the price hike, Netflix proved itself clueless about its own customers and how they would react:

Last November when we launched our $7.99 unlimited streaming plan, DVDs by mail was treated as a $2 add on to our unlimited streaming plan. At the time, we didn't anticipate offering DVD only plans. Since then we have realized that there is still a very large continuing demand for DVDs both from our existing members as well as non-members. Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs.
Who says to customers, "Gee, sorry, but we realized that we were leaving money on the table?" Companies that are out of touch with the most important part of their businesses, that's who. How could management claim not to know that some people would want DVD-only subscriptions when their own figures showed millions who did?

And then Netflix ticked off customers again by announcing that it would split into two parts, creating a division called Qwikster that would rent DVDs, even though the Netflix brand was associated with that service, and give the old name to the streaming service. To make matters worse, the company would do this in such a way as to make it impossible for customers to manage their preferences in one place online.

Running on fear
Netflix compounded its lack of customer awareness with fear. For example, the entire naming debacle showed that the company was afraid of making a mistake. The logical action would have been to use a new name for the new service, developing it over time the way you do with a new brand. But, no, the executives in charge decided to try to leverage the old brand with the new service and then toss some poor amalgam at the existing DVD service.

This latest decision -- and you have to wonder how long it will last -- is another example of fear, this time of those very customers executives didn't understand in the first place. That's running a strategy based on popularity. While it's important to please customers, you don't do so by running at every bit of public distress. Apple (AAPL) is a great example of company that knows how to set a strategy that anticipates customers, rather than react to them, and stick with a decision when necessary.

At this point, every action Netflix takes reinforces its weaknesses and telegraphs to competitors, business partners, and investors that corporate management isn't sure of what it's doing and won't take the hard actions that might be necessary. Good luck to them in the next round of negotiations over programming rights.


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