We’ve seen some pretty interesting decisions from three very large and respected companies these past several weeks that have had a significant impact on literally millions of customers.  

First there’s Quantas where CEO Alan Joyce decided to ground all his airplanes betting that a temporary shut down would force the government to send their labor dispute to the FWA who would, in turn, impose a binding arbitration (in their favor) on both sides.  According to the Economist the move “delighted rival airlines” who “welcomed their defecting customers with open arms.”  The longer strategy apparently is a major restructuring (layoff, route reductions) so that they can set up a a new premium airline based somewhere in Asia along with a joint venture to operate a low-cost carrier in Japan.  

Then we have the Bank of America (they weren’t the only bank just the poster child) who after implementing a small monthly fee for debit card use decided it wasn’t such a good idea after all as customers expressed their anger and frustration in a variety of public ways, the most notable being with their feet.  Apparently credit unions and smaller, local banks gained a fair amount of new customers this past few weeks.  David Darnell, co-chief operating officer said, “Our customers’ voices are most important to us.  As a result, we are not currently charging the fee and will not be moving forward with any additional plans to do so”, according to a recent USA Today article on the subject.

And then, the “old news” of Netflix’ subscriber loss from one-two punch of increased prices (I wrote about this in a previous blog)and aborted plans to split off the DVD rental service into a separate company called Quickster.  In a rather terse email from the “Netflix Team” customers were told “It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs.”  Netflix has thus far lost 800,000 customers from these moves, (200,000 more than they estimated), and it’s share price has been hammered falling from a high of $298.73 to $75.28, a plunge of 37% according to Bloomberg.

Desperate times require desperate measures?  Calculated risks?  What were they thinking?  

All these questions come to mind when considering these three separate, but in my mind, related, situations by companies each in very different industries.  In all three cases the companies have made significant changes to their respective customer experiences.  One by leaving customers stranded in airports, another by charging an additional $5 monthly fee and yet another by changing their service offering’s packaging and pricing.  All experience significant customer backlash, trashing hard won loyalty and, in two cases publicly backtracking on their decision in whole or in part.

These are not small, insignificant decisions, so what’s going on here?  Sure, no one is perfect and not every decision works out 100%.  But this seems, to me, like a gross lack of understanding of their customers, even contempt for them.  I have no idea what internal studies, research, focus-groups, consultants, etc. were brought in to justify such moves.  But, it wouldn’t surprise me to hear that they spent hundreds of thousands of dollars on the research that led to these decisions.  And still they each got it wrong, terribly wrong.  

When B of A’s Darnell said that their customers voices are “most important” to them, I wonder.  What voices were they listening to before they made the decision?  Clearly it wasn’t the customers that caused them to backtrack.

These are all good companies, providing valuable services to millions of customers.  I choose not to believe the are the “dark side” as represented in the “occupied” streets and parks in cities across our nation.  But they clearly are not making decisions that are leading to anything close to a superior customer experience.  And, increasingly customers are becoming "mad as hell and not going to take it anymore."  

How do companies lose touch with their customers so badly as to make these kind of decisions?  I don’t pretend to have inside information on these decisions and companies but this all looks to me like customer experience is taking a backseat to the shorter term economic interests of the company.  The paradox is that in making these decisions, without a true understanding of their customer experience, they are shooting their own economic interests in the foot.  I believe that the primary job of every company that cares to provide differentiated value and reap the rewards of growth in brand preference, revenue and profitability is providing a consistently superior customer experience.  The alternative just isn't very appealing.

At the same time, there is a dramatic shift in power taking place.  Many have indicated that this is going on, one being Glen Urban in his book first published in 2007 called Don’t Just Relate - Advocate.  In his book Urban describes five sources of increased customer power:
  • Increased access to information
  • Access to more alternatives
  • More simplified direct transactions
  • Increased communication between customers
  • Increasing control over contacts
The following year Li and Bernoff’s book Groundswell, laid out a strategy for addressing the growth in customer power through the effective use of social media for both listening and responding to customers.  This shift in power is not new news.  

The plain fact of the matter is companies, now more than ever, can’t afford to be ignorant or indifferent to their customers’ experience.  If they don’t continually improve it they will quickly and, sometimes, dramatically hear about it - only it will be too late.  

Customers (B2B & B2C) are more attuned to value as never before and they won’t settle for less than the best their money can buy.  The question is are you listening, learning and responding now more than ever?  

I, like all Netflix customers this week, received a short, not-so-sweet but to-the-point email the other day:

"We are separating unlimited DVDs by mail and unlimited streaming into two separate plans to better reflect the costs of each. Now our members have a choice: a streaming only plan, a DVD only plan, or both.Your current $9.99 a month membership for unlimited streaming and unlimited DVDs will be split into 2 distinct plans:   
              Plan 1: Unlimited Streaming (no DVDs) for $7.99 a month  
              Plan 2: Unlimited DVDs, 1 out at-a-time (no streaming) for $7.99 a month

Your price for getting both of these plans will be $15.98 a month ($7.99 + $7.99). You don't need to do anything to continue your memberships for both unlimited streaming and unlimited DVDs.
These prices will start for charges on or after September 1, 2011."

As any customer would, I looked for the added benefit from the price increase.  What they are now providing me is “choice”.  So, it would appear that the new "choice" that I now have is to either pay 60% more for the same service, or reduce my service substantially and “save” $2 per month.  Of course I always have the choice of canceling the service altogether.  

And it’s no surprise that there’s been a customer backlash growing from this, some appearing to opt for Choice #3:
  • “no need to give me until september, netflix -- I'm canceling immediately. just don't use it enough to justify $16/month.
  • “I'm with @zpower. Netflix's price hike was enough for me to cancel service today.”
  • “@netflix You've gotta be kidding me. How bout I choose option 3: cancel my subscription altogether? Yeah, that sounds good.”
So, let’s cut to the chase - this is a price increase, pure and simple, but not just a price increase, it's also a change in the customer experience since price is always a part of the overall customer experience we deliver.  While we all seem to get this at one level (usually as the consumer) we seem to miss it when we’re one the other side of the fence setting the prices - except when we use discounting to “get the deal”.

When we look at price as part of the complete experience, we have to realize that Netflix customers’ perception of the overall value is built, in part, by this price point.  Therefore, when Netflix increases their price, it changes the overall experience their customers have with their service.  And with today’s web services subscription model, switching costs can be pretty low.

If we change prices, we’re asking customers to accept a different value proposition (a price increase is always a negative experience for customers.) And if the increase isn’t offset by a corresponding experience improvement, as perceived by the customers of equal or greater value, we have just degraded the overall experience.  And have directly increased customer defection (demand curve).

Going back to Netflix, what was the communicated value improvement?  Choice.  True, I now have the choice to pick unlimited DVDs separately from live streaming, but is this  result in a net positive experience?  Clearly not, since the two together have formed a key part of the total experience, for the price offered.   Breaking them apart is no improvement to the customer experience - certainly nothing I was asking for!

How might this price change be perceived as an overall improvement or at least neutral?  There are many ways, here are just a few that I can think of off the top of my head (as a Netflix customer):
  • Provide better selection of streaming options - something that customer perceive as a negative experience (correct a negative experience)
  • Offer two concurrent DVD’s instead of just one (increase the amount of existing positive experiences)
  • Add a new source of content on one or both options (add a new positive experience)
  • Change the way the more current run movies are delivered by streaming them like Comcast’s On Demand viewing (reduce the customer requirements for receiving an experience)
Of course all of these options incur a higher cost and investment by Netflix, potentially.  But herein lies the heart of the issue: by simple raising prices and not providing an offsetting positive experience, the customer will conclude that the company is simply “lining their pockets” at their expense.  The same experience for a higher price is just the same as a lesser experience for the same price - both are a degraded customer experience!

Which brings me to one other key issue - Netflix is just one alternative for customers.  BitTorrent, Redbox and others are all readily available alternatives.  By changing prices and therefore changing the overall experience negatively, customers will reevaluate their available options in light of this new experience set being provided.  So, anytime we change our customer’s experiences we change our value advantage - possibly to the point of eliminating it.

The majority of the software industry’s revenues come from recurring revenue streams, just like Netflix’s.  One thing that I have seen software vendors do all too easily is to increase support & maintenance plan subscriptions to try to offset lower software license sales.  Doing so without corresponding customer value improvements, is a recipe for disaster.  One that Netflix may be quickly experiencing.  How about your pricing approach?  Do you treat it as an integral part of the overall experience or just one of the “4 P’s” that is just an isolated variable?


    John Geffel

    Value is a much abused, misunderstood and misused word, everyone thinks they provide it but so few show real evidence that they do!

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