Why Netflix Lost 800,000 Customers

By Larry Kahaner

netflixorigami.com

            By now you’ve heard the story of how Netflix’s stock fell from a high of $304 in July to $84 as of last Friday mostly as the result of losing 800,000 customers during the last quarter. The company went from a Wall Street darling to a pariah because of just one move by the CEO Reed Hastings, who announced that he was going to raise prices in addition to splitting the company into two parts: one for DVDs by mail and other for streaming videos. Customers would need to pay more and deal with two different accounts if they wanted to view videos on both media. The company lost almost $10 billion in market capitalization because of this announcement.

            Customers were angry and cancelled their subscriptions in droves. Ever since, business and leadership pundits have been focusing on where Hastings went wrong. He has become an instant business school case study. Only rarely have companies made similar moves that angered customers so deeply. New Coke comes to mind. In both cases, the companies rescinded their decisions (Netflix’s price increase is intact) but unlike Coca Cola, Netflix may not recover.

            In an interview with The New York Times, Hastings said: “I think it was a mistake in underestimating the depth of emotional attachment to Netflix.” He went on to say that he wasn’t sure if the idea was floated to focus groups. If it was, would he have listened to their no’s?

            Hastings was right in saying that the video world is moving away from DVDs to streaming and that his company needs to maintain their leadership in the sector. After all, giant Amazon, is getting into the streaming business as are Verizon FIOS and others. Then there are other outlets such as Hulu and HBO that compete for customer’s viewing time.

            He was correct in foreseeing the future but wrong in his action.

            What Hastings had in his pocket was something rare. He had what companies would kill for: an emotional tie with customers. It’s what keeps companies like Johnson & Johnson, Apple, L.L. Bean and Procter & Gamble in business. People love these companies on a visceral level. They buy their products even if there are better ones out there. It’s that unexplainable reason why we shop at certain stores and not others even though we could get cheaper (maybe even better) goods elsewhere. How companies build this relationship is highly complex and the subject of another blog, but suffice it to say that you mess with this relationship at your peril.

            Hastings messed with it.

            What’s the takeaway? Leaders need to understand, appreciate and respect their company’s relationship with customers. Clearly, customers may not see the vagaries of a business or comprehend the nuances of where it needs to go. They want what they want. Leaders need to respect that as they move the company where it needs to move for future success.

            In Netflix’s case, they have to move toward streaming – there’s no doubt about it - but they should have done it in a way that did not alienate customers and break the bond that had been built. Hastings has publicly apologized but I doubt that lost customers will return. Netflix is paying the price for not respecting the relationship they built with its customers. That’s a shame because I enjoyed getting those red envelopes in the mail along with my diet of streaming movies. I’ve held on a bit longer than others, but I may soon be leaving the Netflix family, too.

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The William G. McGowan Charitable Fund provides grants in three program areas including Health care and Medical Research; Education, and Community Programs for Those Most Vulnerable. It gives priority to programs that have demonstrated success, measurable outcomes, have a plan for sustainability, and aim to end cycles of poverty and suffering.