Innovate, Add Value; Don’t Just Raise Price

Consumer ARE angry over revamped Netflix pricing.

I wrote this a week ago in the Brand Consortium Forum:
What is more important: Investor satisfaction or customer satisfaction? Netflix announced a price increase and share price jumped 2% the next day as customers howled. Is this a trade of short term gain for long term loss? Certainly, Netflix needs the cash and it needs to appropriately charge customers who are high volume streamers. According to Brand Keys, Netflix met 99% of consumer expectations earlier this year, but that score is now 93%. This is brand equity erosion. As every marketer knows, its not easy to build brand equity. How much will Netflix invest in brand equity-building? How much will it cost to bring the brand back to where it was earlier this year? Given its competitive situation, Netflix can’t afford to invest in brand equity. Careful Netflix, this could be the beginning of a downward spiral. It needs to preserve what it has.

Today, the NY Times reports that Netflix lost 600,000 subscribers, making it only the second quarterly customer loss in its history. This does not include the customers who opted for DVDs rather than get their movies streamed. But what of its stock price? Does the investment market believe that 600,000 subscribers were not worth keeping anyway? Share price was down almost 19 percent to $169.25 on heavy trading yesterday.

This cost-driven price increase is not an uncommon situation for many companies. Additionally, the economy is making customers think twice about monthly subscription services. These services are commodities despite the providers’ use of technology to deliver the service rather than brick and mortar. Customers will trade off price for convenience and/or time shifting. Netflix is not the only source for movies.

Is there a way out for Netflix? Maybe there are some lessons from the CPG industry. CPGs are in the same situation: increasing costs, price-sensitive customers, commodity-like products. SymphonyIRI recently reported that product categories with the highest brand loyalty demonstrate less sensitivity to price increases. For example, 67 percent of coffee buyers are loyal to their coffee brand, and that is a decline of only 1.5 points from 2008, despite a 21 percent rise in prices in the same period. In contrast, 33 percent of sugar buyers are loyal to their sugar brand, and that is a loyalty loss of 6.5 points since 2008 as prices went up about the same amount. Some brands and collectively, some product categories, successfully invest on building brand loyalty. Brand loyalty mitigates the effect of price increases on sales.

How can you build loyalty? One way is through innovation. Since 2008, SymphonyIRI reports loyalty to brands in the beer category is generally down by 0.4 points. But within that category, craft beer sales are up as smaller firms produce new blends. The national brands then buy or partner with the craft brews to provide broader distribution. Without meaningful innovation, the category would have suffered a steeper decline in loyalty. Meanwhile, wine has seen a 0.8 point gain in loyalty as it new labels have rushed to market. New offerings build connections to the offerer.