July 14, 2011

The Netflix Price Increase and "New Coke": Marketing Fails 101?

By now you've probably heard that many Netflix subscribers are more than a bit peeved over the sudden 60% increase in the cost of maintaining an Internet streaming (comparatively limited selection) and full DVD-by-mail subscription.

Netflix's customer service lines are overloaded, their blog maxed out on comments, and some of the language that upset subscribers are spouting isn't at all pretty, and sounds like it may more commonly be reserved to describe child molesters.

Given the various alternatives available, it's unclear how this will all shake out, but it does appear that Netflix either forgot (or chose to ignore) a primary rule of marketing and brand protection: When you take something away from people that they've already come to expect, the backlash can be enormous.

In this case, Netflix subscribers had come to expect streaming and DVD access at a known price point, and the relatively large, sudden increase triggered what should have been a predictable upset among a significant proportion of their subscribers.

This isn't to say that a $6/month increase is a lot of money in an absolute sense. But most of us tend to react more emotionally to large relative changes, often almost irrespective of absolute numbers in many cases.

So while Netflix can try argue that the costs involved in shipping DVDs are going up, and that the new price remains an excellent deal -- the emotional reaction is still likely to be "Why should I pay 60% more for the exact same service next month than I did this month?"

A somewhat similar situation, though not involving price, occurred back in 1985, when the Coca-Cola Company suddenly replaced their regular Coke product with a sweeter, more Pepsi-like "New Coke" formulation.

Blind taste testing prior to this change demonstrated that the new formula should be greatly preferred. The company was sure that they had a winner in their perpetual battle against Pepsi, which had become a formidable competitor. But when New Coke was launched, the reaction was almost entirely negative, with an intensity similar to what might have happened if the American flag had been abruptly replaced with the Soviet version.

The original Coke started appearing on the black market. Protests and boycotts were organized. It was a public relations disaster.

Within three months, Coca-Cola Company restored the "old Coke" -- which would be branded thenceforth as "Coca-Cola Classic" (until 2009, when the word "classic" was removed from the main product title entirely).

In the case of Coke, consumers reacted very negatively to the removal from the market of a product with which they were already familiar, even though the new product likely would have tasted better to most consumers (at least in controlled test situations, which of course do not encompass the totality of the normal consumer "user experience" in this regard).

But like with so many aspects of life, the moral to the Coke story isn't entirely one-sided, and the same may prove to be true for Netflix.

The Coca-Cola Company ultimately ended up with an even larger market share than they had prior to their New Coke fiasco. Netflix's price increase may have the effect of driving some subscribers to competitors, but in the long run may be highly beneficial to Netflix's bottom line -- their investors seem to be betting that this will indeed be the case.

But in the short term at least, if gaining negative PR is your goal, go ahead and vastly increase your relative price for the same services, start charging any amount for services that used to be free, or suddenly remove from the marketplace products that consumers have come to know and love over a long period of time.

If you're lucky, you may still come out ahead in the end.

Then again, you may find yourself in long-term residence deep within the Pit of Despair.

My own preference would be to avoid alienating customers in the first place whenever possible, rather than treating them as disposable commodities to be cynically manipulated solely for one's own gains.

But then again, I'm just an old-fashioned guy that way.


Posted by Lauren at July 14, 2011 02:45 PM | Permalink
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