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Small Business Lessons from Netflix's Pricing Debacle

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Small Business Lessons from Netflixs Pricing Debacle

Movie-rental company Netflix raised its prices last week, and its customers have set the Internet aflame with their ire.

Customers left more than 12,000, mostly angry messages on the company's blog. Many vowed to leave Netflix for Hulu, Blockbuster and other competitors.

What lessons can you learn from Netflix's massive customer backlash? Here are six:

1. Do market research. Netflix's change seems to have hit members like a board upside the head. Did they not test the waters and ask customers what they might pay for these services? Perhaps a better price structure could have been devised with more customer input.

2. Raise prices for new clients. Netflix might have stemmed the backlash by keeping existing prices for current members and charging new members the higher price. After a time, Netflix might have phased in the new price for older members or offered them incentives to keep their old rate -- for example, by paying a year up front.

3. Offer a discount. Netflix introduced two new, higher set prices for DVD-only members and streaming-only members at $7.99 each. Then, its rate for access to both services is simply $7.99 times two. This may be the most outrageous aspect of the change -- American consumers are trained to expect a discount if they buy the full meal deal from you. It probably would have smoothed many ruffled feathers if customers could get both services at a discounted bundle price.

4. Consider the competition. Netflix has now priced itself higher than Blockbuster, which has a larger stock of streaming-video movie choices. Their long-beleaguered competitor sees its chance here and quickly set up a custom landing page on its website just for Netflix customers that offers 30-day free trials and discount prices. Asking customers to pay more when you have less to offer seems like a bungle.

5. Think of the economy. It's still really slow, and some are thinking double-dip recession. Maybe the timing was simply wrong for the price increase. In better times, a few bucks more to rent videos might not have bugged so many customers.

6. Netflix will still make more money. Even if a substantial portion of customers quit Netflix, projections show that the company will still see a revenue increase. Wall Street did some quick math on the announcement and sent the company's stock higher, despite the backlash.

Sometimes business growth isn't without growing pains. Netflix seems to have decided to take its lumps now because it needs the cash.

What do you think of Netflix's move? Leave a comment and let us know.

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