Netflix, Customers, and Evolving a Business Model

July 25, 2013

As a Netflix customer, I have been fascinated by its recent move into original programming.

Netflix began as a mail-order DVD service that revolutionized the movie rental business with a brilliant logistics system. Instead of driving down to the local movie rental store, consumers could now choose videos from the comfort of their homes and get new movie releases delivered right to their doorsteps.

Netflix (along with the more recent RedBox) upended the video rental industry, and brick and mortar rental stores like Blockbuster were decimated as a result.

Blockbuster failed to see the direction that the industry was heading, and it evolved too slowly. Some of this was beyond its control, some was not.

Now, the industry is evolving again, and this time it is moving towards streaming content. Netflix seems determined to keep pace and even lead the shift.

Yet, with change comes challenge, and one of Netflix’s challenges will be maintaining the customer experience as it changes some of the fundamental features of its business model.

Netflix Dumps Movies for More Television

In an excellent article in Yahoo Finance entitled Netflix Dropped Your Favorite Movie, Get Used to It, Aaron Pressman writes about Netflix’s new strategy. It can be captured in a few key points:

  • More original programming
  • Exclusive licensing deals with major content providers
  • More dramatic television
  • A thinner catalog of movies with an emphasis on new releases

The Shakespearean-flavored House of Cards, a political drama featuring Kevin Spacey and Robin Wright, was Netflix’s first foray into original programming — and, along with a few other titles such as the relaunch of Arrested Development, it worked. According to Pressman: 

More than 12% of Netflix subscribers said they signed up because of the original programming and another 8% said they would have canceled but for the new shows, according to a survey of 1,000 U.S. customers last month by Wedbush Securities.

A quote from the article encapsulates the heart of what Netflix is trying to accomplish:

Executives have been telling investors that the company is modeling itself as the HBO for the Internet. ‘The goal is become HBO faster than HBO can become us.’

With Netflix’s change in direction comes a shedding of its previous strategy. Netflix will no longer be a virtual Library of Congress for movies. It is beginning to limit its catalog of older movies. Classics like Big and Young Frankenstein will get the axe.

As both a Netflix and Amazon Prime customer, I can tell you that finding classic movies (using streaming) is a lot harder on Netflix than it is on Amazon.

Netflix is embracing a changed business model, and it will not please all of its existing customers. Customers who came to Netflix because they wanted to be able to rent almost any movie under the sun will likely find the service providing fewer options over time.

What can be done to help soften the change?

How to Handle a Changing Business Model

Here are five tips for handling a change in business model:

  1. Accept That You Must Change — Most businesspeople have a fondness for their early customers — the early supporters who helped them succeed. Care about them and what they think, but do not sentimentalize them. You have no obligation to run a failing or unprofitable business. Realize you are helping more customers by keeping your business economically viable. In the case of Netflix, the data seems to make a compelling case that change should come.
  2. Communicate the Why — If change must come, communicate the reasons for the change clearly with your customers. You will be amazed what people will understand when they know the why behind it.
  3. Sell the Benefits of Change — You might be moving away from something, but you are also moving towards something else. Let your customers know the benefits to them of the new business model. Presumably what you are moving towards is more popular, more profitable, or both. Someone likes it; help your existing customers understand why they should like it too. It will not satisfy everyone, but if you have earned the loyalty of your customers, it can give them a reason to give your new direction a chance.
  4. Bribe Them — If you believe in your new direction, then put your money where your model is. Run the numbers and figure out incentives that can be used to get customers who are on the bubble to stick around long enough to experience the benefits of change.
  5. Help Them Go Happily — You can’t save them all, so make sure to leave on good terms. First, make it easy for them to leave, and second, if you can, help them transition to a service that will fit their needs. This second option is sensitive and depends on the competitive landscape in your industry, but customers remember how you left it with them. End on a positive note when at all possible.

Managing a changing model can be one of the most daunting customer service challenges in business. Change often starts with a numerical analysis — how many more will we gain and how many more will we keep — however, what begins with numbers ends with people.

Remember that a changing model means a different customer experience. If you have a strategy to reach out to customers who are not fond of the change, you might just see your original numbers get even better.

2 thoughts on “Netflix, Customers, and Evolving a Business Model”

  1. I say it often: “If you don’t know the why, the how doesn’t matter.” And communicating the “why” to customers is what allows them to understand reasons for change. They’re more likely to be accepting of change when they understand the reason for it. Cheers! Kaarina

    1. Great phrase Kaarina. Very true. It doesn’t fix every situation, but in general people are much more understanding when you show them the consideration of explaining the reasons for your decisions.

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