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?

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    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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