I cannot help but continue to write about Netflix and their business decisions –  maybe that’s because Netflix keeps making extremely dubious decisions. First, Netflix angered its customers with an out-of-nowhere price hike that was clumsily communicated (and resulted in 1 million customers cancelling their subscriptions).

Now, Netflix has decided to split itself up into two companies with two names – the company’s fast growing online streaming service will stay under the “Netflix” brand, but the DVD-by-mail business that launched Netflix will now be marketed as a separate brand called Qwikster.

Lessons to learn from Netflix’s good decisions or mistakes?:

  • Price doesn’t matter as long as you provide the right customer experience. When Netflix raised its prices by 60%, many customers protested and many analysts wondered if Netflix was sealing its doom. But in the end, only 1 out of 25 customers (4%) cancelled their subscriptions. This is a sign that despite the public outcry, most customers are not strictly motivated by price. Most of Netflix’s customers value the service and are willing to keep paying for it. We always tell our clients that competing on price is a loser’s game. Instead, companies need to understand what their customers truly value. Netflix was able to raise prices and maintain their customers because they provide a product they value, which minimizes price as an issue
  • Relevant selling is about asking your customers to choose what they want most. Farhad Manjoo in Slate wrote about the Netflix/Qwikster story, saying that although this move seems strange, it might actually be a good decision for Netflix (and their customers) in the long run. Netflix is basically trying to separate its customers based on the services they want most. Instead of being all things to all people and straddling the fence between “DVD-by-mail” and “online video streaming,” Netflix can corral its DVD-by-mail customers under the Qwikster brand, while preserving the Netflix brand for its faster-growing and more profitable service of online streaming. As Farhad Manjoo writes, “The key advantage of Netflix’s new model is that it will give each side of the business—the DVD side and the streaming side—flexibility to manage its service in a way that pleases its own customers.”  By dividing itself into “Netflix” and “Qwikster,” Netflix is making a strategic decision in an attempt to be more relevant to what the customers want. DVD-by-mail customers might not care about online video streaming. Tech-savvy online video viewers might be too impatient to wait by the mailbox for the latest DVD to arrive. Instead of trying to please both of these different groups, Netflix is asking them to choose. Netflix is betting that in the long run, more customers will migrate to online streaming, and DVD-by-mail will die out. Netflix is disrupting its own business model before a competitor does it for them.
  • Relevant selling is not without risks. There are several possible downsides to the Netflix decision. Customers now have a new brand name to learn, and Netflix might lose some brand equity as a result. The two halves of the company will not share any common data for customers’ movie queues, so if you want to watch certain movies on DVD, you won’t be able to list and track those same movies on the online streaming side. This part of the decision might prove to be a mistake – Netflix’s unique queue to organize your movies and save your favorites was a big selling point for many customers.

With this latest decision, is Netflix ensuring its long-term prosperity, or accelerating further loss of subscribers and a drop in stock price?

Do you think Netflix’s latest decision is crazy or brilliant? Leave your comment below.

Since this blog was written, Netflix decided to scrap the idea of splitting up their company, and they are keeping both streaming and DVD rentals under the Netflix name. I think this decision just saved their company. What are your thoughts?

See related article on Netflix competitive advantages.

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