NetFlix Didn’t Have Bad Ideas, Just Bad Timing

As a business owner I know that my business always needs to be moving forward, never backward. I am constantly reviewing my business operations to keep an eye on the health of the company. Always checking out the competition to see what others are doing that we aren’t. Recently the Netflix company implemented several changes but they had poor timing.

NetFlix was trying to move forward. They had two problems that they wanted to address; first was that they had an increase in costs to provide service; second was that their DVD-by-mail service was being utilized less and less and their new customers hardly used it at all. The solution to the first problem is obvious, raise your subscription fees or cut costs. The second problem was a little more difficult.

Everyone knows that video stores are dead, the last one my town had closed this summer and there is now a Halloween costume store in its place. Netflix knew that their DVD-by-mail service was dying and that few of their existing customers, and almost none of their new customers, were using it. Most were downloading videos over the internet. So Netflix made a pre-emptive strike, they tried to split the DVD business under a new name so they could separate the two companies. (And regardless of what Netflix says, the only reason to split off a division of an existing company as a new company under a different name is to prepare it to be sold off). But their customers rebelled.

More than 800,000 subscribers cancelled their subscriptions, a loss of almost 100 million dollars a year. Even though most of their customers downloaded videos and rarely if ever received a DVD, they wanted to have the option. The changes Netflix made were too much too fast, and their customers couldn’t adapt.

While no business can survive without change, Netflix didn’t implement their changes well. They made a mistake by failing to recognize earlier that the change in their business model had raised their costs. By the time they realized their mistake they tried to make a massive and sweeping course correction, but the market wouldn’t bear it. Had they instead initiated smaller changes over a longer period of time, say a year, customers would have accepted it. They could have enacted a smaller price increase for existing customers to maintain their existing subscriptions, and initiated a two-tier system whereby new customers would have to subscribe to one and then add the other. Netflix could have made up for some of their losses without slicing their customer base.

They are still between a rock and a hard place but now they have 100 million a year less in revenue. They have the same problems of not enough revenue and costs that are too high. They still have a division of their company that is dying and apparently they are all out of ideas.

The lesson here for small business owners is to pay attention to your company. You’re the captain of your ship and it is your job to keep it on course. If you turn the wheel too hard and too fast you’ll swamp your ship. It takes less work to sail an even keel and make small course corrections than it does to bail water.

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