Netflix has faced a flood of criticism since announcing plans to hike monthly subscription prices by 60 percent next month.
The company's poor handling of the price increase contains a wealth of lessons for small business owners.
In case you did not hear the news, Netflix announced that it is splitting its movie streaming and DVD delivery services in September. As a result, it will no longer offer them in one package and will instead charge users a separate fee for streaming movies and receiving them by mail. Some Netflix customers will pay as much as $ 6 more a month, though the hike for others will be smaller.
Customers continue to flood its website and Facebook page, bashing the move, reducing to drop their service and criticizing every announcement Netflix makes (even those totally unrelated to the development).
Who knows how many people will actually follow through and cancel. A lot of the threats could be hot air, because Netflix offers a service – streaming movies and DVDs by mail – that people still love. And anyway this was indeed a wise move that will boost Netflix's financial health. But you can bet that the company's image has taken a major hit.
Here are some lessons you can take from its handling of the situation:
Ease your customers into a price increase – There are three fundamental problems with the way Netflix handled the situation: It raised prices by an unusually large amount, it did not warn customers that such an increase was coming and it implemented the hike fairly quickly. Customers do not like these kinds of surprises. A price increase of 5-10 percent is difficult to swallow, but consumers can usually get over it fairly quickly. A spike of up to 60 percent is almost unheard of, especially when it comes less than a year after a move to raise prices by up to 10 percent. There was no indication that a price increase was in the pipeline, and Netflix is only giving consumers a month-and-a-half until the new rates kick in. As a business owner, you should limit increases to reasonable levels, offer customers some advanced notice that prices will be rising and – if the spike is significant – delay implementation for several months.
Clearly explain reason – What really irked many Netflix customers is that the company did not really explain its reasons behind the move. If it said that, say, prices to secure movies and content are rocketing, or that its costs in general are rising, it might have defected some criticism. But it sugar-coated the increase by saying it will give customers "more choice." A word to the wise: You better have a darn good reason for hiking prices, and you better make a really good attempt to explain that reason to your clients. Given the competitive nature of the business world, you should not take such moves lightly.
Appease your loyal followers – Netflix built its business in large part via word-of-mouth marketing, especially in the early days. Many consumers have been with the company since the early days, and they are very vocal about their love for the service. But this is a classic case of forgetting about those who made you successful. Netflix did not even attempt to reach out to its loyal customer base. It could have, say, grandfathered in long-time customers, locked in prices for current members through the end of the year or offered some other way to blunt the price increase. Instead, the company simply told customers that they can always change or cancel their subscriptions.
Sympathize with your customers – Some of the choice words directed at Netflix revolve around the perception that the company displayed arrogance in its handling of the price increase, in part because it did not fully explain the reasons behind the move and did not cater to its loyal customer base. It also did not acknowledge that a price increase in difficult economic times is tough on consumers, nor did it make an attempt to respond to the outpouring of anger from its customers (Netflix simply said it "expected" such a reaction). Reaching out to your customers – even if it's just by recognizing the impact of a price increase – should be a top priority in these cases.
Add value – Price increases are inevitable in any business, as are customer complaints. Companies should always expect a certain amount of blowback. But you can limit this by creating more value to justify the higher price increase. Netflix failed miserably at this. Offering customers a choice of paying more for the same services they receive now is not added value. The company should have bolstered content in streaming movie content or possibly cemented a deal to make new releases available more quickly. Be sure you tie a price increase into a viable benefit for consumers.