Dahlke, Holm, Houf, Scott 1 Netflix Case Study Overview: Today, Netflix is the world’s largest online movie rental service. As of 2013, Netflix had over 33 million subscribers in 40 different countries. Netflix, the first company to create an online DVD movie rental service, offers over more than one billion hours of TV Shows and movies per month. Netflix’s popularity and success steams from the subscriber’s ability to watch unlimited TV shows and movies anytime, anywhere. With Netflix, viewers are capable of streaming these TV shows and movies over the Internet to their televisions, computers and mobile devices. Netflix is very convenient for its members because it allows them to pause and resume watching at their own pace and doesn’t have any commercials. This service has created a new movie market. Although viewed with a positive and successful image today, Netflix faced a decline of nearly one million subscribers in 2011 for their lack of communication and business strategy when the company split into two separate entities and announced a price change, which created uproar from their large customer base. Reed Hastings and Mac Randolph founded Netflix in 1997. The two co-­‐founders had previously worked for software developing companies, thus giving them experience in the technology forum. In 1998, Netflix was officially open for business, having only 925 titles to release and 30 employees. As the business started to appeal to customers, Netflix took the next step and started making promotional deals with Toshiba, Sony, Apple, and HP. This brought success and experienced rapid growth in popularity and number of subscribers. Hasting’s genius idea of creating a business where people have access to unlimited movie rentals and online streaming to TV shows and movies with the ability to return them when they pleased, no late fees assessed, proved to be just as genius as it sounds on paper. Throughout the years, Netflix continued to expand and grow, reaching over 20 million subscribers by 2010 with a net income of nearly $160.9 million. Customers’ satisfaction with the service provided by Netflix only grew as did the subscriptions, until July 12, 2011 when Netflix announced on its company website that there would be a price change for consumers and a split between the online movie streaming from its DVD-­‐by-­‐
mail service. With the price change announcement came harsh criticism from consumers who were Dahlke, Holm, Houf, Scott 2 not only displeased by the change in price from the flat rate of $9.99 per month for movies available through unlimited online streaming and the DVD-­‐by-­‐mail service to a steeper price of $15.98 for the same service, consumers also expressed anger regarding how Netflix had delayed contacting loyal subscribers about the planned changes to the company. Within hours after releasing the announcement, thousands of frustrated members were complaining. One member stated, “Nothing like doubling your price and adding no value.” Netflix instantly lost over one million subscribers. In addition to the loss of subscribers, the company also experienced a drop in stock prices, which dropped more than 40 percent from July to September in 2011. During this three-­‐month period the trading value of Netflix’s stock went from $298 a share to $169. Netflix knew they had made a poor decision on how they handled their new business strategy. Hastings and David Wells, Netflix chief financial officer, stated the following: “We know our decision to spilt our services has upset many of our subscribers, which we don’t take lightly, but we believe this spilt will help us make our services better for subscriber and shareholders for years to come” (Case Study pg. 6). Problem: Netflix had an unprepared business strategy and did not follow through with a well-­‐
developed business plan. Netflix made the mistake of announcing its increase in price and business spilt in an uncommunicative way. The company’s way of delivering the news left their customers and audience unclear on the message. This lack of communication caused negative reactions from Netflix customers who irately left over 17,000 comments on the Netflix’s Facebook page, creating a social media crisis for their company. After the price change and new business plan came into effect, Netflix had lost over one million subscribers. Alternative Solutions: Creating and maintaining a strong trustworthy relationship with one’s costumers is essential for an organizations success. However, Netflix failed to clearly communicate with its clientele regarding a significant change within the company. This communication error created an uproar among the company’s customers, and lead to a strong decline in subscriptions and revenue. This Dahlke, Holm, Houf, Scott 3 prompts the first alternative solution: Netflix should have clearly communicated with its strong clientele prior to the release of information on significant company alterations. On July 12 2011, Netflix announced on its company’s website that it would be increasing rental rates as much as 60 percent. Before the change was made, the service of unlimited online streaming and movie rentals could be obtained for a flat rate of $9.99 per month. However in July 2011, the online movie provider decided to change the subscription fee to $7.99 for online streaming and an additional $7.99 for DVD-­‐by-­‐mail, totaling $15.98 per month for both services, a $5.99 increase. Then in Sept. 2011, CEO Reed Hasting announced online that the company would be splitting into two separate companies; Netflix for online streaming only, and Qwikster for DVD-­‐by-­‐
mail. These changes lead to a loss of over one million subscribers by Sept. 2011. Both announcements were made online, and caused extreme frustration within the public. Netflix should have informed its customers of the company’s changes prior to the day of implementation. Also, Netflix should have described in detail the reasoning behind the price increase and split of the company. By doing so, Netflix may have been able to keep its clients and their loyalty and avoided the crisis that came with as a result of their lack of communication. Excellent customer service is a necessity for both the success and survival of a company. Netflix’s’ communication with its clients was detrimental to the company’s success, however, that was not the only issue. The online movie provider also failed to conduct accurate research before releasing the name for its future DVD-­‐by-­‐mail company, leading to the second alternative solution: Netflix should have conducted more extensive research before releasing and finalizing the separation of the corporation into two separate companies. After the separation of the company, a customer said: “It seems to me that companies that truly value their customers make the customer experience as helpful, seamless, and easy to understand as possible. What Netflix has done was ‘exactly the opposite’” (Case Study pg. 7). At first the issue was the neglect to communicate clearly with customers. As if that wasn’t bad Dahlke, Holm, Houf, Scott 4 enough, it soon became apparent that the company had failed to accurately research the name of its new organization: Qwikster. Unfortunately, a Twitter account had already been created by a Jason Castillo under the same name ‘Qwikster’. Unaware of the difference between the twitter user and Netflix, the Netflix client base began following @Qwikster. This aroused even more frustration and issues because the Twitter user, @Qwikster, had posted vulgar messages, and had his image icon as Elmo from Sesame Street smoking marijuana. Netflix should have extensively researched Qwikster before using it as the name of its new company. By not conducting accurate research, Netflix further lost subscriptions and trust amongst its clientele. Evaluation of Alternative: Netflix should have informed its clients of the separation of the company, and of the price increase prior to implementing such changes. By not informing the public, it appeared as if Netflix did not care about the reactions of its consumers, which lead to a decline in one million subscribers. However, if the changes were explained in detail, Netflix would have had a better chance in maintaining a strong relationship with its customers. CEO Reed Hastings responded to the countless negative comments from customers by releasing an apologetic blog post and YouTube video, describing the reasoning and importance of the company’s changes. The post ended with Hastings saying: “Both the Qwikster teams will work hard to regain your trust. We know it will not be overnight. Actions speak louder than words. But words help people to understand actions” (Netflix Case Study 8). In order to regain its customers, Netflix’s public relations practitioners should have coordinated either a press conference or intricately detailed letter describing the changes to its key public: the Netflix customers. By initially addressing the company’s separation and price increase, the extremely popular corporation would have been able to better help its customers understand their reasoning, and hopefully keep its customers loyal. If the company would have initially addressed the changes, Netflix may have been able to avoid the harsh comments and decline in subscriptions from its customers. Also, Netflix should have conducted better research before choosing the name “Qwikster” for its DVD-­‐by-­‐mail company name. Fail to notice that the name was being used as a twitter account Dahlke, Holm, Houf, Scott 5 ‘@Qwikster’ made Netflix out as a careless company as well as one that didn’t care about their customers. The customers were confused about the new company name; they clearly didn’t conduct accurate research. After the announcement of Qwikster, “Netflix’s stock closed trading at a value of $143.75, experiencing a on-­‐day loss of $11.44 to close down 7.37 per cent” (Netflix Case Study 8). In order to regain its customer following, Netflix would need to relay a message to it’s target audience apologizing for the ongoing confusion. Although Netflix kept the name, the company would need to eradicate the confusion by explaining the meaning behind the name, and the way to follow the company, and not a random social media user. By doing so, Netflix would prove that excellent customer service is still something they strive to achieve, and that their customers are the most important aspect of the company. Recommendations: Netflix’s inability to actively communicate with it’s customers about the company split and price increase left them with a public relations nightmare in 2011. Although frustration of customers is inevitable with a 60 percent price increase, had Netflix openly communicated why they were to implement these business strategies with their customers immediately, along with providing extensive reasoning behind the company’s decision, they would have avoided customer outrage. One customer explained “[they] found out about this on Facebook a full 18 hours before [they] got an email about the upcoming changes to [their] account from Netflix.” The customer finished saying,“[t]hat, in [their] opinion, is completely unprofessional.” People like to be the first to know when changes are made to their personal accounts and memberships. Netflix needed to announce these changes to each customer prior to applying them. We suggest Netflix communicate these changes via an email or letter in the mail to each customer as well as holding a press conference to the public after they have informed their customers of the change. This strategy allows customers to be warned about the changes and given an opportunity to understand the reasons behind them. The failure to conduct research when choosing a name for their new DVD-­‐by-­‐mail company name left Netflix customers confused and aggravated. “It seems to me that companies who truly value their customers make customer experience as helpful, seamless and easy to understand as Dahlke, Holm, Houf, Scott 6 possible” (Netflix Case Study 7). We suggest Netflix had done the necessary research to avoid this problem in the first place. Hastings explained himself in a blog post on September 18, 2013. Although we agree that a blog post would be helpful for customers to reference, most people lack the time to read a lengthy post from their DVD-­‐rental supplier. Had Netflix wanted to be successful, in addition to the blog post, Netflix should have informed their clients individually and then held a public conference to clarify any lingering questions. Possible Results and Obstacles to Implementation: If Netflix were to follow through with our recommendations they would avoid the major chaos that ensued after announcing their price hike as well as the addition of Qwikster, the new DVD-­‐
by-­‐mail branch. Of course, any company deciding to raise their prices by 60 percent will experience dissatisfaction from their customers. However, had Netflix better communicated the reasons behind their major changes to the company and given customers the opportunity to query about their decisions, they would have experienced less wrath from their customers. Maintaining the trust of its stakeholders should have been a top priority of the company’s in order to ensure the future of its profitable business. Like any relationship in life, when there good lines of open communication do not exist the relationship when more times than not fail. This analogy can also be applied to the lack of research, if you start a relationship and don’t do the proper research you will most likely find out some things about them later on that you don’t like. Had Netflix created a good line of open communication and done the proper research, the outcome of the company’s internal and external changes would have been dramatically different. The obstacle that Nextflix would have had to face, had they dealt with the issue using our recommendations would be in convincing the public that the changes made were ones that were necessary for the continuation of the company’s success and that the continuation of the company’s success was also something that was in their customers best interest. The clear advantages to using the services provided by Netflix should have been spelled out to the consumers and stakeholders. If people were to understand the advantages of the changes, we believe that they would continue their loyalty to Netflix and also see why it is a company that is not going to go away. Netflix’s key publics Dahlke, Holm, Houf, Scott 7 needed to be reminded of everything that the company stands for and explained to the reasons why the company has the ability to succeed forward. Works Cited: 1. "Netflix." Netflix. N.p., n.d. Web. 4 May 2013. <http://ir.netflix.com/>. 2. "Great Idea + Poor Communication = Customer Service FAIL. Netflix pt 2.." The Collective. N.p., 21 Sept. 2011. Web. 4 May 2013. <http://www.photo-­‐
collective.com/2011/09/21/great-­‐idea-­‐poor-­‐communication-­‐customer-­‐service-­‐fail-­‐netflix-­‐
pt-­‐2/>. 3. "Netflix." Netflix. N.p., n.d. Web. 4 May 2013. <http://ir.netflix.com/>. 4. "NetFlix Movie Rentals Mission Statement -­‐ A Vision, A Promise and Nine Values."About. N.p., n.d. Web. 4 May 2013. <http://retailindustry.about.com/od/retailbestpractices/ig/Company-­‐Mission-­‐
Statements/Netflix-­‐Movies-­‐Mission-­‐Statement.htm>.