Small Business Lessons From Netflix: Price Hikes Are Tricky

Posted by Marie on October 9, 2011

This post is a bit late to the party, but Netflix’s woes of the last few months reflect at least three mistakes that businesses, especially small ones, should keep in mind.

1. Price hikes are tricky.
Back in July, Netflix announced an across-the-board price increase for all members. The negative talk began immediately. Instead of addressing people’s concerns directly, Netflix, as far as I know, stayed silent and just waited for the September price increase date to roll around.

In that time, would-be subscribers decided not to join and long-time members canceled their service. Enough people acted that Netflix had to issue a notice saying the company would not be meeting its projected financial figures.

It doesn’t matter that the reasons for the rate increase are easily understandable and pretty obvious. The raising of prices automatically comes with negative feelings. (Think about the postage stamp increases of a couple cents at a time.) The best thing for a business to do is to avoid them as much as possible.

This may mean setting a price right at the beginning that will account for these future rates. One can always use discounts, sales, and promotions to be more in line with current market demands.

If a price increase is necessary, and may you be in business long enough for this to become your dilemma, it helps to think of the move as a campaign and not as a solitary action. Changing a price is as easy as hitting a few buttons these days, but the company should think about how it wants to communicate this change.

Should it be positioned as “Gee, we hate to do this to you, but our costs are up and in order to continuing doing what we do, we really really really have to do this”? Or can the price increase be delivered along with increased value? Has the product been upgraded and is therefore better? Are there more services bundled in with the originals?

Even if the price increase’s true reason is the first one, see if you are not able to achieve the second. Brainstorm how you can justify the additional cost to your customers by making them know that they are also getting a better deal.

In my opinion, this is where Netflix really failed on their subscription increase announcement. They want to push everyone over to streaming, where there are lower overhead and potentially higher profit margins, but they didn’t simultaneously announce better streaming services. They didn’t announce that a lot more and newer titles will soon be available. They didn’t announce better speeds and more reliable connections. In fact, with a few of their contracts falling through, the perceived amount of in-demand titles available on the streaming side is actually going down.

So their customers heard: We’re raising prices. You’re getting less.

Yep, the people were not happy.

Stay tuned for Lessons 2 (Easy Business is good business.) and 3 (Avoid breaking up with your fans.)…