Netflix Explodes Its Customer Goodwill

A few months ago, pioneering movie rental company, Netflix announced some new price changes that really ticked off its customers.

Essentially, the move separated the company’s DVDs-by-mail service and its online movie-streaming services, so that you have to pay separately for each service, or bundle them together at a much higher price than customers were paying before.

Customers howled. Even I had this to say about it on a post on Google+:

I’m sure someone had a great spreadsheet that showed in irrefutable detail why this new pricing structure would be a good idea. But strategically, it is a bad move. Netflix adopted DVD mailing as a bridging strategy for a day when the world was ready for online distribution. It’s how they beat the more established competition. I liked having both online and mail options. Online for the convenience and mail for selection (the licensing for online distribution is a real bottleneck). Now, to keep this advantage, I have to pay a steep price increase and neither option by itself looks all that compelling. I am considering dropping the service altogether today. They should have waited a bit, until their online catalog was stronger, before making a move like this.

Customers weren’t the only folks disappointed in the company. Its shares have dropped by half since the announcement:

 Insult to Injury

Then, this morning, I wake up to find an email in my inbox from Reed Hastings, the CEO of Netflix. It started off like this:

Dear Gideon,

I messed up. I owe you an explanation.

It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming and the price changes. That was certainly not our intent, and I offer my sincere apology…

Wow, I think, maybe they did get the message and are planning on rolling back their mistake and addressing the concerns of their customers. It’s so rare and refreshing when companies do that, but prior to this recent mess-up, I’d always been impressed with the company, so maybe there was hope.

Then I kept reading:

So we realized that streaming and DVD by mail are really becoming two different businesses, with very different cost structures, that need to be marketed differently, and we need to let each grow and operate independently.

It’s hard to write this after over 10 years of mailing DVDs with pride, but we think it is necessary: 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.

Nope. The insanity was just reaching new proportions. Now the company was completely destroying the one source of competitive advantage that set it apart from competing online services. Now, I would have two movie queues to manage and I get to pay more. Also, who knows whether my movie preference and other useful data will still span between the two services.

In other words, aside from now being able to rent games by mail (which we don’t use), there really are no positive moves here for customers – only downside.

The funny thing about all this is that Hastings made this announcement to correct the impression that the company “lacked respect and humility” in the way it rolled out its changes. Nope. That’s not the problem. The problem is that this latest move simply reinforces the impression that the company lacks any real customer empathy and customer focus.

When you hear companies explaining moves like this to their customers by using terms of “different cost structures” it’s a sure sign that a company is too internally focused – that it’s gotten lost in its internal discussions about business models and internal structure and lost its ability to see things from the point of view of customers. That’s the first sign of death for a company.

Far from addressing the problem, Hastings’ announcement had instead just stirred a hornet’s nest, as you can see from the responses he’s already received from customers on the Netflix blog. The company has just exploded most of its goodwill with customers.

My Decision Was Now Easy

When I got that original notice of the price changes a few months ago, I told myself we should probably drop the service or just switch online streaming only. But in the end, I didn’t and we ended up paying $32 a month for the full DVD and streaming packages. Apathy and Netflix one, Gideon and family zero.

But today’s announcement just got me stirred up again – enough so, that I finally switched our service plan to streaming-only. So now Netflix is only getting $7.99 a month from us – less than a quarter of what they were making before, and probably a third of what they were making before this whole unfortunate set of decisions.

We’re lucky. We have an awesome video store just a mile or so from us, and we should have been using them all along. We’ll stay with Netflix for streaming for now, but that’s not out of any real passion for the service or the company behind it – something I actually did use to feel with these guys. I just don’t have the time to look for something better right now.

That’s not the kind of loyalty you want from your customers. And the truly sad thing about this situation was how quickly the company destroyed its goodwill with customers. It’s really too bad. I really did like Netflix. It just goes to show how important it is that companies always, always keep customer empathy and focus forefront in their decision making processes. Without that, it’s just a matter of time before you fall.


 P.S. – the ill-conceived nature of this decision continues to unfold. Apparently, nobody told Jason Castillo, the current holder of the @Qwickster name on Twitter, that he was about to start running a large-scale DVD-mailing service. Looks like some 2,000 people just started following him.

Oops. Not sure a doobie-toting Elmo is what they had in mind for a logo for a movie-mailing service positioned around speed. Slow down, dude. What’s your hurry…we’ve got plenty of copies of Cheech and Chong’s “Up in Smoke.”  Who knows? Maybe they’ll branch out into distributing munchies (and other goods) with their movies. A whole new sort of brand extension. I get it now – that’s why they wanted to separate it from the Netflix name. Brilliant…

 OK – one more…a hilarious comic, satirizing the whole debacle: 

 October 10, 2011 Update: Qwickster Killed

It’s rare when I feel sorry for a company, but that’s exactly the feeling I had this morning when a friend sent me a link to this recent post by Netflix CEO Reed Hastings. After all these missteps over the last several months, culminating in the launch of a new service called Qwickster, Neflix is essentially saying: er, never mind.

It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs.

This means no change: one website, one account, one password… in other words, no Qwikster.

While the July price change was necessary, we are now done with price changes.

We value our members, and we are committed to making Netflix the best place to get movies & TV shows.

Thank you.


Ugh, this is just too painful to watch. I give them credit for having the courage to reverse a stupid decision, but overall, I think these guys just managed to destroy a really healthy lead over their competition, and even more importantly, years of accumulated goodwill with their customers. When you take your eyes off being in service of what customers really want, well, that tends to happen. It’s too bad. I really did like these guys.


  1. With you 100%. Had just finished a similar comment on Geekwire’s coverage of the story. I think this is a mis-reading of “The Innovator’s Dilemma”. Likely switching to Amazon Prime or some other option…

  2. Right on. We have actually been using Hulu and then Red Box when we want a movie fix. $1 a night.

  3. Hello,
    Netflix announced some new price changes that really ticked off its customers.I’m sure someone had a great spreadsheet that showed in irrefutable detail why this new pricing structure would be a good idea.It’s so rare and refreshing when companies do that, but prior to this recent mess-up, I’d always been impressed with the company, so maybe there was hope.
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