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THE NETFLIX ROLLERCOASTER
The letter arrived in m llions of e-mailboxes simultaneously. Reed Hastings, the CEO of Netflix, announced in excited tones the latest innovation by the company that had revolutionized the movie rental industry. But the response was not quite what he, or Netflix shareholders, had expected. The series of events offers a clear lesson in how a failure to plan strategy changes sufficiently can backfire on even the most successful of companies.
THE ORIGINAL OFFER: 1998-2008
The origin story goes that Hastings came up with the idea for Netflix after being charged late fees for keeping a rental movie after its due date. Instead, Netflix Would have no late fees; users could keep the movies as long as they wanted . With no brick-and-mortar stores, Netflix relied on the Internet to take customer orders nd the mail system to deliver the discs. The company’s millions of subscribers It counted 1million in 2002, more than 5 million in 2006, and 14 million in 2010-
,c?uld choose from sevelal flat-rate monthly subscription options and keep up to eight movies out at a time . Customers returned videos using a pre-paid and pre addressed envelope. Then Netflix automatically mailed the next video on the cus t mer’s video queue, and customers could change and update their queues as
0 ten as they wanted. .
- , The growing number of customers, along with growing profits, made Netf . s management and stockholders quite happy. Observers praised it as a top p0ll1Pany, a great investment, and a stellar example of how innovation could drive
rofits and growth.
Section 0<1a Assessing the Marketplace
AND THE HITS KEEP COMING: 2008-2010
. . ·. ‘· . I ·…)
Netflix was innovative, and its careful analysis of the surroundings suggested
some serious threats. First, several competitors had entered the market to compete
directly with Netflix. Blockbuster, which enjoyed great name recognition, added mail delivery services to its existing brick-and-mortar stores. Redbox came onto the scene, allowing patrons to borrow first-run, popular movies from conveniently located boxes for just $1 per day.
Second, reports from the U.S. Postal Service indicated an impending problem for Netflix. Due to budget overruns and deficits, the Post Office noted the possibil ity that it would need to shut down hundreds of local branches. It also started talking about the possibility of halting Saturday service. These threats were sig nificanffor Netflix, which relied heavily on the U.S.P.S. to help it get its red enve lopes into customers: mailboxes quickly.
‘Third, it realized that some cable companies and satellite operators were doing
more with pay-per-view options. Not limited to special events or boxing matches, this model was being applied to movies, immediately after their video release.
In response, Netflix started down a new path: Customers could view unlim ited streaming of movies and TV shows, still for the same monthly fee they were paying for receiving discs in the mail. The new offering was a nearly instant hit, picked up and enjoyed by most of its subscribers. This response encouraged Netf lix to expand the option. In addition to streaming through their computers, users could use platforms that would deliver its titles to the Nintendo Wii, Xbox 360, PlayStation 3, and TiVo. Hardware options from Panasonic, Insignia, and Seagate
- soon joined, though even these were outshone when, Netflix also introduced an
OOOPS, MY BAD: 2010-2011
Perhaps unsurp ingly, Netflix soon realized it was leaving money on the table by providing both mail and streaming service for the same price it had previously been charging for just the mail service. Itwas offering more value; if reasoned that it could charge a higher price.
It started by launching a streaming-only plan for $7.99 per month in Novem ber 2010. At the same time, it increased the cost of each of its DVD plans by $1 each. If customers wanted both, they could sign up for the streaming plan and add DVDs for $2. Netflix anticipated that most users would drop the mail service, be cause so many consumers seemed heading toward streaming.
“. That prediction was not quite accurate. Users still wanted to open their mail boxes to find the red envelopes. In addition, the selection of titles for the mail ser
vice was significantly greater than that available through streaming, so customers still found value in it. By July 2011, Netflix announced another new pricing plan. For unlimited streaming, and no discs, customers paid $7.99 per month. For one
disc-at-a-time (the most basic mail plan), and no streaming, customers would pay
$7.99 per month. If they wanted both, they paid $15.98. The new pricing would come into effect on September 1, 2011.
Customers were furious. For many of them, the new plan represented an ap proximately 60 percent price hike. Netflix had anticipated some backlash-it pre dicted that some customers would even drop the service. But approximately 1mi,llion people did, and the negative press about the company, especially in social media, was intense. On Netflix’s own blog, more than 12,000 comments
were posted in response to the announcement, and readers would be hard pressed to find one with a positive tope. But investors considered the price move a smart one, and Netflix’s stock prices rose.
There were no such silver linings for Netflix’s next misstep. At around mid night on Sunday, September 18, 2011, Hastings posted a new announcement to the company blog, entitled “An Explanation and Some Reflections .” The text has
Deve loping Marke ting Strategi es and a Marke ting Plan Ct1.1pter Two 59
become somewhat infamous, and the wording is remarkable enough to call for some extensive quotes. The letter began: “I messed up. I owe everyone an expla nation.” Hastings apologized for ‘riot ‘c61I1II’l.unicating enough about the price change, and he accused himself of sliding “into arrogance based on past success.”
Then he explained his solution to the mess:
. ..we realized that streaming and DVD by mail are becoming two quite different businesses, with very dif.ferent cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently. It’s
. hard for me to write this after over 10 years of mailing DVDs with pride, but we think it is necessary and best: In a few weeks, we will rename our DYD by mail service to ‘Qwikster.”
We chose the name Qwikster because it refers to quick delivery. We will keep the name “Netflix” for streaming. . ·
Qwikster will be the same website and DVD service that everyone is used to. It is just a new name, and DVD members will go to qwikster.com to access their DVD queues and choose movies. One improvement we will make at launch is to add a video games upgrade option… .Another advantage of separate websites is sim plicity for our members. Each website will be focused on just one thing (DVDs or streaming) and will be even easier to use.A negative of the renaming and separa tion is that the Qwikster.com and Netflix.com websites will not be integrated. So if you subscribe to both services, and if you need to change your credit card or email address, you would need to do it in two places. Similarly, if you rate or review a movie on Qwikster, it doesn’t show up on Netflix, and vice-versa .
There are no pricing changes (we’re done with that!). Members who subscribe to both services will have two entries on their credit card statements, one for Qwik ster and one for Netflix. The total will be .the same as the current charges.
So in addition to paying more, customers in 2011 would need to visit two separate Internet silifs to manage their movies, rather than just handling streaming and mail services on Netflix.com. They also would have to reset their preferences on the new site. And they would have to deal with the name “Qwikster”-something that their comments indicated that they universally hat ·
By October 10, 2011, in a simple, brief post, Hastings reversed the split. Both
services would stay with Netflix, though the price increase would remain in place.
But the damage had been done. More customers had left, and Netflix’s stock price had plummeted. Observer s waited anxiously to see what the 2011 fourth quarter reports would show. The Netflix blog entries went back to promoting new content. Reed Hastings stayed quiet-at least for the moment. ··
- Explain Netflix’s :marketing Can it sustain its competitive advan- tage? Why or why not? ‘
- How has their strategic change and rapid reversal affected their customers?
Do you believe this situation is a short-term public relations nightmare or a
long-term reversal of fortune?
- Perform a SWOT analysis for What are its biggest threats and which
opportunities should it pursue?
- What is the best way for Netflix to grow its business? Justify your