Don’t Fool Around With Your Customers!

03 Nov 2011

On October 24th Netflix, the market leader in video streaming services with their $7.99 unlimited monthly subscription, reported its Q3 financial results to the Street. The following day, the company’s share price plummeted and closed at $77.37 from $118.84 the previous day. Netflix lost over a third of its value or $2.1B in the space of a few hours.

What happened?

The company ended the quarter with $799M in revenue, up 44% from a year ago and net income of $62M, up 63% from a year ago. Despite the impressive growth, why would investors abandon the company in such a massive way?

A careful read of their 8-K form reveals the simple answer: “we greatly upset many domestic Netflix members with our significant DVD-related pricing changes, and to a lesser degree, with the proposed-and-now-cancelled rebranding of our DVD service.”

This confusion generated a significant negative impact on Netflix’ customers. For the September quarter, Netflix added 4.7M new subscribers, but a whopping 5.5M existing subscribers canceled their subscription, so their total number of subscribers went from 24.6M at the beginning of the quarter to 23.8M in 90 days. In other words, the company added 19% to its base, but lost 22% of its existing customers and therefore the total number of subscribers decreased by 3% during the quarter. It is not hard to understand now how the 22% loss of customers translated into a 35% loss of the company’s market cap. By not adding net new customers this quarter, Netflix’s revenue growth will be negatively impacted in the near future and investors took note.

Netflix created serious damage to its customers by failing to recognize what they value most: simplicity of the offering, easy pricing and great customer support. Suddenly customers lost their confidence in the company to understand who they are and what they want. Customers became confused about the Netflix’ values that were so attractive to them. The gap between the customers’ expectations and what Netflix offered has been unexpectedly widened and a tremendous amount of enterprise value has been destroyed in that process…

The sad thing is that Netflix could have totally avoided the situation it put itself in.

Up and Right!

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