Look Before You Leap! Netflix’s $10 Billion Mistake!

Netflix (Nasdaq: NFLX) made a bold move last month by telling their customers “thank you” for all of their years of loyalty. To express their gratitude, they decided to raise the price of their streaming and rental packages. What resulted was an astounding “your welcome” from their customers who jumped ship, causing an approximate 40% drop in their stock price (approximately $10Billion USD).

Last month, Netflix decided to test their customers’ loyalty by raising their prices. This is not something out of the ordinary as prices for everything are increasing given the current economic condition of the World. However, what makes this price increase different is that it was not one that had to take place and a logical explanation for the price increase was never given. Netflix did not need to raise the price of their services for anything other than profit. Even worse, Netflix then decided to unbundle their two main services of streaming videos and DVD rentals into two separate companies. This decision allowed their customers to compare prices for each individual service as they were now shown separately. Customers soon found out that with this price increase, they were better off going with a competitor like Amazon.com (Nasdaq: AMZN). Ever wonder why when you go to Priceline.com they never show you the individual price of the flights, hotels, and rental car when you purchase them as a package? It’s because they know that consumers will search out the best price for the individual items and buy the cheaper parts of the package on a competitor’s website. I wonder if anyone from Netflix ever booked a vacation on Priceline.com????

Over the last couple of weeks, the internet has been littered with news about Netflix, but they all have one common theme: Market research is extremely important. Although it cost money to conduct this research, the upfront cost can save a company money (and potentially their business) in the long run. The NYDaily News adds that a company should never make a change without communicating and never follow a mistake with an even bigger mistake (referring to unwinding their packages after not explaining the need for the price increase).

The moral of this article is that even a billion dollar company such as Netflix can collapse based purely on bad market research and a few bad decisions. Within 90 days, they have been able to unwind a company that has revolutionized the DVD rental industry. With any luck, and hopefully some market research which lately has been absent, Netflix will be able to sustain their business and not land next door to Blockbuster (P.O. Box Bankruptcy).


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