Marketing 4th Edition by Dhruv Grewal,Michael Levy

تمرين 2

THE NETFLIX ROLLERCOASTER
The letter arrived in millions of e-mailboxes simultaneously. Reed Hastings, the CEO of Netflix, announced in excited tones the latest innovation by the company that had revolutionized the movie rental industry. But the response was not quite what he, or Netflix shareholders, had expected. The series of events offers a clear lesson in how a failure to plan strategy changes sufficiently can backfire on even the most successful of companies.
THE ORIGINAL OFFER: 1998-2008
The origin story goes that Hastings came up with the idea for Netflix after being charged late fees for keeping a rental movie after its due date. Instead, Netflix would have no late fees; users could keep the movies as long as they wanted. With no brick-and-mortar stores, Netflix relied on the Internet to take customer orders and the mail system to deliver the discs. The company's millions of subscribers-it counted 1 million in 2002, more than 5 million in 2006, and 14 million in 2010-could choose from several flat-rate monthly subscription options and keep up to eight movies out at a time. Customers returned videos using a pre-paid and preaddressed envelope. Then Netflix automatically mailed the next video on the customer's video queue, and customers could change and update their queues as often as they wanted.
The growing number of customers, along with growing profits, made Netflix's management and stockholders quite happy. Observers praised it as a top company, a great investment, and a stellar example of how innovation could drive profits and growth.
AND THE HITS KEEP COMING: 2008-2010
Netflix was innovative, and its careful analysis of the surroundings suggested some serious threats. First, several competitors had entered the market to compete directly with Netflix. Blockbuster, which enjoyed great name recognition, added mail delivery services to its existing brick-and-mortar stores. Redbox came onto the scene, allowing patrons to borrow first-run, popular movies from conveniently located boxes for just $1 per day.
Second, reports from the U.S. Postal Service indicated an impending problem for Netflix. Due to budget overruns and deficits, the Post Office noted the possibility that it would need to shut down hundreds of local branches. It also started talking about the possibility of halting Saturday service. These threats were significant for Netflix, which relied heavily on the U.S.P.S. to help it get its red envelopes into customers' mailboxes quickly
Third, it realized that some cable companies and satellite operators were doing more with pay-per-view options. Not limited to special events or boxing matches, this model was being applied to movies, immediately after their video release.
In response, Netflix started down a new path: Customers could view unlimited streaming of movies and TV shows, still for the same monthly fee they were paying for receiving discs in the mail. The new offering was a nearly instant hit, picked up and enjoyed by most of its subscribers. This response encouraged Netflix to expand the option. In addition to streaming through their computers, users could use platforms that would deliver its titles to the Nintendo Wii, Xbox 360, PlayStation 3, and TiVo. Hardware options from Panasonic, Insignia, and Seagate soon joined, though even these were outshone when Netflix also introduced an iPad application.
OOOPS, MY BAD: 2010-2011
Perhaps unsurprisingly, Netflix soon realized it was leaving money on the table by providing both mail and streaming service for the same price it had previously been charging for just the mail service. It was offering more value; it reasoned that it could charge a higher price.
It started by launching a streaming-only plan for $7.99 per month in November 2010. At the same time, it increased the cost of each of its DVD plans by $1 each. If customers wanted both, they could sign up for the streaming plan and add DVDs for $2. Netflix anticipated that most users would drop the mail service, because so many consumers seemed heading toward streaming.
That prediction was not quite accurate. Users still wanted to open their mailboxes to find the red envelopes. In addition, the selection of titles for the mail service was significantly greater than that available through streaming, so customers still found value in it. By July 2011, Netflix announced another new pricing plan. For unlimited streaming, and no discs, customers paid $7.99 per month. For onedisc- at-a-time (the most basic mail plan), and no streaming, customers would pay $7.99 per month. If they wanted both, they paid $15.98. The new pricing would come into effect on September 1, 2011.
Customers were furious. For many of them, the new plan represented an approximately 60 percent price hike. Netflix had anticipated some backlash-it predicted that some customers would even drop the service. But approximately 1 million people did, and the negative press about the company, especially in social media, was intense. On Netflix's own blog, more than 12,000 comments were posted in response to the announcement, and readers would be hard pressed to find one with a positive tone. But investors considered the price move a smart one, and Netflix's stock prices rose.
There were no such silver linings for Netflix's next misstep. At around midnight on Sunday, September 18, 2011, Hastings posted a new announcement to the company blog, entitled "An Explanation and Some Reflections." The text has become somewhat infamous, and the wording is remarkable enough to call for some extensive quotes. The letter began: "I messed up. I owe everyone an explanation." Hastings apologized for not communicating enough about the price change, and he accused himself of sliding "into arrogance based on past success." Then he explained his solution to the mess:
... we realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently. It's hard for me to write this after over 10 years of mailing DVDs with pride, but we think it is necessary and best: In a few weeks, we will rename our DVD by mail service to "Qwikster."
We chose the name Qwikster because it refers to quick delivery. We will keep the name "Netflix" for streaming.
Qwikster will be the same website and DVD service that everyone is used to. It is just a new name, and DVD members will go to qwikster.com to access their DVD queues and choose movies. One improvement we will make at launch is to add a video games upgrade option.... Another advantage of separate websites is simplicity for our members. Each website will be focused on just one thing (DVDs or streaming) and will be even easier to use. A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated. So if you subscribe to both services, and if you need to change your credit card or email address, you would need to do it in two places. Similarly, if you rate or review a movie on Qwikster, it doesn't show up on Netflix, and vice-versa.
There are no pricing changes (we're done with that!). Members who subscribe to both services will have two entries on their credit card statements, one for Qwikster and one for Netflix. The total will be the same as the current charges.
So in addition to paying more, customers in 2011 would need to visit two separate Internet sites to manage their movies, rather than just handling streaming and mail services on Netflix.com. They also would have to reset their preferences on the new site. And they would have to deal with the name "Qwikster"-something that their comments indicated that they universally hated.
By October 10, 2011, in a simple, brief post, Hastings reversed the split. Both services would stay with Netflix, though the price increase would remain in place. But the damage had been done. More customers had left, and Netflix's stock price had plummeted. Observers waited anxiously to see what the 2011 fourth quarter reports would show. The Netflix blog entries went back to promoting new content. Reed Hastings stayed quiet-at least for the moment.
Questions
How has their strategic change and rapid reversal affected their customers? Do you believe this situation is a short-term public relations nightmare or a long-term reversal of fortune?