Netflix Teaches Product Managers Lessons About Pricing

by drjim on February 13, 2012

Netflix customers were not happy to receive a dramatic price increase

Netflix customers were not happy to receive a dramatic price increase

As product managers we all dream of the day that we could muster up the courage to actually raise the price of our product. Just imagine – we wouldn’t have to do any additional work, and we’d be able to bring in even more money! Apparently the product managers over at Netflix had the same idea because they decided to dramatically raise their prices. That’s when bad things happened…

What Netflix Did

So just exactly what did Netflix’s product managers do that generated such a fuss? Well, once upon a time Netflix had a very popular product that they were selling: for $9.99 / month, customers could subscribe to a service that provided them with the option to rent one DVD via postal mail at a time and stream an unlimited amount of online videos. Needless to say, people loved this service and signed up for it in droves.

Then the Netflix product managers listened to what their account manager and / or business development manager told them about boosting profits and they went and changed things. They unbundled this service. That means instead of subscribing to one service, now their customers have to subscribe to two different services: one is a service that will deliver DVDs to their homes and the other is one the will allow them to access streaming video over the Internet. Oh, and each of these services is now priced at $7.99 / month. If you continue to subscribe to both, then your monthly bill just went up by 60%!

What Netflix Did Wrong

So what was the result of this little pricing action by the Netflix product managers? How about the loss of 1 million customers and the company stock dropping by 19%. Ouch – that’s not going to look good any anyone’s product manager resume!

So where are these million lost customers going to go? There are a number of possibilities: Amazon, Apple, and Hulu. However, none of these services have either the scope of Netflix’s offering nor Netflix’s “all you can eat” approach to online streaming.

Which leads us back to our original point: if there is no clear alternative to Netflix, then those one million customers must have been pretty angry at Netflix in order to leave them. What did Netflix do that was so wrong?

The first mistake that the Netflix product managers made was that they surprised their customers. Nobody saw this 60% price increase coming. Secondly, Netflix forgot to offer their customers any additional value. I mean really, if you’re going to boost my price that much, then you’d better be throwing something into the mix that will help me understand why you’re doing it.

Finally, when everyone started to complain about the change, Netflix was strangely quiet – they didn’t really react to the feedback that they were getting from their customers. In baseball, after three strikes you’re out. Let’s hope that the Netflix product managers have learned their lesson.

What Nextflix’s Product Managers Should Have Done

So now that it’s clear that the product managers at Netflix have made a mistake in how they went about changing their product’s pricing, what should they have done? What’s missing here is strategic management of a product’s price. The key item to remember when you go tampering with your product’s pricing is that any changes that you make to a price must be done as though you were having a conversation with your customer.

In Netflix’s case, the product managers should have started the process by issuing a series of press releases talking about all of the additional content that they were adding to both their physical DVD service as well as their streaming service. In those press releases they should have also brought up the fact that their costs were going to be going up, but that they thought that it would be worth it for the additional content.

Next, they should have incrementally raised the price of the combined service. Don’t jump the price by 60%, instead over time boost it two times by 30% — but include an announcement of new content each time you do it.

Once the price has hit the new higher level, reward your customers by telling them that you’ve heard their complaints (because there will always be complaints) and announce that you’re going to separate the services and offer each at a price that is lower than the original service was offered at.

In the end you’ll get to the same price point. However, it’s how you got there that makes all of the difference. You will have had a dialog with your customers along the way and although they may not fully agree with you, they’ll understand why it all happened. If the Netflix product managers had gone about changing their prices in this way, then they’d still have the million customers that they lost doing it their way.

What All Of This Means For You

The forbidden dream of every product manager is to raise the price of their product. In fact, the ability to do a good job at this task really should be a part of every product manager job description. The Netflix product managers have gone and done this very thing and by doing so, they’ve generated a great deal of anger in their customers.

By making changes to what that they were selling, Netflix transformed a service that many people had purchased into two separate services that came with a combined price tag that was 60% higher than the old service. It turns out that surprising your customers like this is never a good idea.

Where Netflix went wrong was taking a service that customers had already bought and changing its price without changing the product. If they had cancelled the old product, added value to the new product and then raised the new product’s price, then there would have been fewer complaints.

Product managers need to learn that our customers don’t like surprises. We need to make sure that by changing our product’s price we don’t place them in a situation in which they’ll feel like they have to make the purchasing decision all over again.

- Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Product Management Skills™

Question For You: Do you think that Netflix should have warned their customers that they were going to be changing their product’s prices?

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What We’ll Be Talking About Next Time

How are sales of your product doing? Not so well? Are you thinking about changing the price of your product? Is it looking like you are going to have to raise your prices because everything is costing you more? What’s that going to do to your sales? Have you told the account manager and business development manager that you work with? It turns out that the fish department in your local grocery store is having the same problem – maybe they can show us what we need to be doing…

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{ 6 comments… read them below or add one }

Praveen February 13, 2012 at 5:12 am

Very interesting article!.

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Hans Fremuth February 17, 2012 at 5:27 pm

Great article. I do wonder, however, how much product manager abuse was involved in this case (aka as executive override…).

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Dr. Jim Anderson February 26, 2012 at 8:57 am

Hans: That’s a great point. However, no matter how much executive override is involved, at the end of the day the Product Manager is still the one responsible for the product’s success…!

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Peter Terpak March 15, 2012 at 12:26 pm

intersting article… however what we can’t see is what was the actual motivation of netflix guys to do so…

we won’t find out, but it could have been either the greediness of the company to pump up their pockets, or the pressure of movie labels to increase licence fees being afraid netflix is cannibalising their other business (DVD sales, hotel rentals etc)…

being somehow from the industry i would bet my money on the latter option… especially considering rumours which were flying around that certain labels were considering not to prolong the licensing to netflix… then unfortunately netflix must not have had too many options :-(

so i think we will not find out… however i agree netflix should be more transparent about it…

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Dr. Jim Anderson March 20, 2012 at 4:12 pm

Peter: I think that Netflix believes that physical DVVDs are going away and they were trying to position the company to be an online streaming company. However, they did too much too quickly.

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Dr. Jim Anderson March 20, 2012 at 4:13 pm

Peter: I think that Netflix believes that physical DVDs are going away and they were trying to position the company to be an online streaming company. However, they did too much too quickly.

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