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5 Things HR Pros Can Learn From the 2011 Netflix Pricing Changes...

Raise your hand if you're pissed off about the Netflix price hike...

Many of you are, others of you have no idea what I'm talking about.  You undoubtedly know who Netflix is - they're the people who killed the local video store - Blockbuster, et al - by changing the game.  Instead of having costly retail space, Netflix originally provided videos through mail order - you paid a monthly fee, then Netflix you could rent a movie that would be mailed to you, then you mailed it back to get another movie sent to you based on what you had reserved.  All you can eat, you just have to get it back in the mail. Brilliant.

Netflix always innovates.  One thing they've spent a lot of time on is the ability to "stream" portions of their video library - taking advantage of the broadband connections in most homes and the tech savvy nature of their customers. The move to streaming would help make the business more profitable - mailing out all those DVDs isn't cheap, it turns out...

So, onto the recent news - Netflix announced a pricing change in July 2011 - here's the rundown of the details from TechCrunch:

"Netflix is officially on an all-out assault on the DVD — or so says their just-released pricing strategy. The new prices yell loud and clear that streaming is the future and you’re going to pay (literally) if you don’t hop on the bandwagon. Maybe this is why Reed Hastings stated back in May that DVD shipments might go down for the first time ever.

Gone are the plans that include streaming and DVD. Customers previously had the option of selecting the streaming plan for $7.99 and then paying an additional $2 to be able to rent one DVD at a time. Now the plans are separate with the streaming plan costing $7.99 and the DVD plan at $7.99; selecting both options for $16 results in a 60% price increase. Current subscribers will be able to ride the lower price until September 1st, but the plan just went live for new customers. Ouch."

The reaction among Netflix customers was ugly:

"And, as you may have heard, customers were not happy. No, they were not happy at all. In fact, on the blog post in which Netflix announced said pricing changes, over 12,000 comments were posted (and that’s using Facebook’s commenting system, something TechCrunch readers are unhappily familiar with), most of them angry, and many in turn did their own announcing, saying they would be tendering their resignations, effective immediately.

Of course, but, so what? Well, according to YouGov’s BrandIndex, in the ten days since Netflixmade its price changes, the national perception of Netflix’s brand among adults dropped precipitously from a 39.1 on July 12th to -14.1 on July 18th, and currently sits at -6, putting Netflixin a virtual tie with Blockbuster. With a margin error of 5, that’s no tiny aberration."

So what's it all mean?  What can you learn from the Netflix pricing change as an HR Pro?  I think the following 4 things:

1. Costs and margins matter.  Don't kid yourself.  If you believe you can migrate the customer to a similar product but a cheaper delivery platform and you choose not to do it because you're scared of the blowback (from employees in your case), you're going to run the risk of having an operator make the call for you.  Put on your big boy/girl pants and make the call.  It's called business, and you have to participate.

2. Take all the pain at once.  If you're making a move that's going to be seen as negative, ask yourself the following question: "What do we need to include in this organizational change, so we get as much of the change out of the way with this single announcement as possible?"  Don't do 2-3 change announcements if you can do it all in one package.

3. Communicate why you're doing it.  Why?  What's the goal?  Does it make the organization more stable as a result?  Sell the reasons - or get judged without your voice present.  Netflix didn't do this - their move was designed to drive people away from the costly DVD model or make them pay dearly for it - and they didn't say that.  You can do better.

4. Consider grandfathered tiers in the change. Can you make the change effective with new employees and protect grandfathered status for existing employees?  May not be the right thing in your situation, but certainly a damage control mechanism (if the math works out) that you should consider.

Blowback happens.  Take the time to read through the Netflix pricing situation and the resulting uproar from customers and ask yourself - what would you do differently if you had to migrate all of your employees to a consumer-based health plan in January?

It's your business, and the issues at play are the same for a VP of HR as they are for the CEO of Netflix.

Comments

TJ

Two others come to mind:

1) Don't sell it as something it's not. Netflix tried to spin the price hike as being the lowest price ever for DVDs. Technically it was (If you wanted a DVD package, it was minimum $10/month), but as a current customer, it looked like they were peeing on my leg and calling it rain.

2) This isn't so much an HR thing, but tell customers what's in it for them. My biggest issue with the price hike as a customer was that there was no value associated with the price hike. I'm paying more for the same thing. If (as is rumored) they increase their streaming content in the near future that's one thing, but right now there's no upside for buyers.

Dave

Chris, this is a good analogy, and I think you need to call out one more point to the learning piece at the end: Figure the long-term value of your staff into the decision.

In other words, there are different classes people at your company, and they are going to need different experiences. Highest-valued customers should be getting the best treatment. Those who are low-value for their role should be given low-value treatment.

Eric Barrett

I don't fault Netflix for making a business-based decision. It doesn't do me any good as a subscriber if they go out of business. But jacking up the pricing by 60% without much of an explanation is a terrible way to set expectations, reward customer / employee loyalty, or create any kind of satisfaction with the company.

Simply giving a realistic preview of why the change was necessary would have gone a long way to saving a lot of the blowback. Not to mention the potential millions of dollars Netflix may lose if customers are as ticked as the internets claim.

That kind of email certainly would have cost a lot less, no matter how long it took to write.

Sarah Rolph

I don't understand what people are upset about. I'm a Netflix customer and I had a positive reaction to the change.

They sent the email well in advance, it doesn't change until September, so I can think about it; if I do nothing, nothing changes.

They gave us free streaming for a long time; I never expected it to stay free. I don't use it much, so I can get the same number of DVDs I do now for less money by dropping the streaming. Or I can stay on the same plan and get the same thing I get now, DVDs plus streaming, for the same price.

What is the problem?

Tom

Nice.
I'd add: Don't trivialize the backlash. For the Netflix spokesman to shrug off the concerns by saying (paraphrasing) 'it's the price of a latte to most people' just didn't sit right with me. If you know you have an unpopular decision to make, at least act like you care about the people who get upset. Even if it's a token gesture. Remember how far Clinton got by feeling our pain?

A Facebook User

I always felt that Netflix was kind of too good to be true and that we better enjoy the shear amount of programming for such a low price. I had the option of spending a minimum of $80 a month for programming through cable or satellite with none of the instant streaming available due to my location. Or I had the option of putting up an antenna for local stations and getting Netflix for everything else. When the price increased I wasn't surprised- it was still a good deal for our family at $6 more a month. I think we have only begun to see the costs increase in this area- internet streaming. We cannot expect to get unlimited amounts of data for one set price. Eventually the internet picnic is going to end and everyone is going to be on the same page- so much for competition. Enjoy it while we can is my motto.

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