We’re all familiar with this story.
A business is at the top of its game, makes a trajectory-decision based on an assumption, and subsequently misses the mark. In this case, the business is Netflix, the assumption was about its customer base, and – as we all witnessed (and were perhaps, as Netflix customers, privy to the news via e-mail) – Netflix missed the mark.
A year ago, if anyone had said that within the span of one month, Netflix would lose 800,000 customers and its stock would plummet, that person would have been laughed out of the “society of business punditry.” Netflix was the game-changer of how people consumed movies – arguably responsible for the closure of Blockbuster Videos around the country, as well as much of the Internet’s traffic. There was basically no current competition for Netflix; the business was at the top, gaining two-plus million new customers every quarter. Things were golden, until…
- …until a haphazard blog post announced a price hike of 60%.
…until CEO Reed Hastings issued a disarmingly casual “I-messed-up” e-mail.
…until they decided to split the service into two different services
(instant streaming staying as Netflix, and “Qwikster” for DVDs by mail).
…until they retracted that decision.
Netflix had a good business model. They had loyal customers. They had happy stockholders.
What went wrong?
First: Netflix made an assumption about their customer base, and this assumption was egregiously incorrect. They assumed that their customers were passionate enough about Netflix to stick by the business – that no matter what, these customers wanted their movies and would continue to use Netflix’s services. Although Netflix was right about their customers being passionate, they didn’t realize the passion would be railed against the company itself. In response to a price hike and change of services, Netflix’s customer base passionately informed the company of their disappointment and disapproval, and 800,000 of them jumped ship.
Second: Netflix employed poor communication and execution of the changes in service. Whether or not the new business model was good or necessary is one thing, but the way Netflix both announced and unveiled the changes fell short of their game. The announcement of changes first came through a seemingly slap-it-together blog post late at night, which sent the Internet ablaze in fury. Then Reed Hastings sent out an e-mail one might expect from a college buddy rather than the CEO of a company.
Finally, they retracted their decisions within a month of the first announcement. In the meantime, amidst all of these embarrassing communication flubs, the Qwikster website was not ready when the service launched, and the Twitter account was already in use by a drug-using teenager with foul language. All in all, the launch was sloppy. It seemed uncoordinated – like a last-minute decision gone awry.
We could spend all day disputing and defending the good and the bad and the ugly of Netflix’s recent business decisions, but I’m more interested in discussing the implications every business can take from this situation.
So what can we learn here?
What we can learn is that when you’re on top – when you’ve positioned yourself as a leader in your market, even if its just your local market – each decision must be well thought out (and hopefully the right one).
In the fast changing business world of today, it’s sometimes necessary to make drastic changes to a working business model. But before you are ready to go to the presses (or your customers) with these changes, make sure the model is carefully thought through in minute detail. Not analysis paralysis – but at least a thorough vetting with trusted voices. You have to at least try to do everything right or don’t do it at all.
If you are going to make business decisions based on assumptions, make sure they are the right assumptions. Validate them. Test them. Make sure you have the data to back it up before you go ahead and change your business model.
Once you have your facts in place, make sure you communicate well to all affected stakeholders. When you’ve amassed a loyal customer base, you need to keep them by respecting them, and respect comes through how you communicate. When all of these factors are set in place, ensure that your new business model is ready to launch from all sides of the company. You can’t cut corners – the market is too demanding and too connected for that.