Raising Prices? Think your customers will notice? Businesses can learn a ton from the recent Netflix price increase.
You think your industry is changing! The old, crusty movie rental industry is changing even faster. First there was brick and mortar, then mail order, kiosks, on-demand and now iPhone downloads. Netflix has instituted its second major price increase—a 60 percent increase—in less than a year and customers are complaining big time across the Internet.
Netflix is taking a gamble with a bunch of loyal, but less profitable, customers. No one knows how many will walk. No one knows if this is the catalyst for a mass exodus to Redbox or piracy sites, but my guess is that Netflix knows what it is doing. Netflix sent a message to its loss-leading customers, but will there be a backlash? Only time will tell. The company is blending price increases with more value-added service options to approach this challenge.
Raising prices is a fact of life for any business, and how you handle it could make or break you.
A few years ago, a business conducted an annual customer survey noticed several customer complaints about it raising prices. Many said they were buying somewhere else now, and others noted they were shopping around. The owner went on to explain to me that he raised prices about 20 percent over six months because of an ugly lease situation that was putting pressure on his business. He felt he could slowly raise prices unnoticed. Ooops!
It just so happened that sales were slipping as well. The owner immediately went into damage control to explain his situation to key customers in hopes they would understand. He felt he had to delicately explain what was going on in hopes many of his larger customers would stick with him. The better thing would have been to be proactive before or during the time when the increases were happening.
Netflix will be very interesting to follow in the months to come as we learn what happens with drastic price hikes. Blockbuster took out the local movie rental guys with lower prices, Netflix took out Blockbuster by changing the game and lowering prices, and now Redbox is trying to do it again with kiosks and iPhone downloads. Netflix has 22.8 million customers in the United States, but Redbox is growing like a weed—it currently has 27,000 kiosks, an established iPhone application download strategy with over 1 million downloads already, and recently rented its billionth movie.
While I don’t pretend to be a movie expert since it’s been 25 years since I stepped foot in a movie theater, this dynamic is going to be interesting to watch from a pricing viewpoint. Whether cleaning carpets, making cabinetry, printing or renting movies, pricing strategies change, and you need to be prepared. Call me weird for not appreciating movies, but I think everyone else is weird for not fishing for hours on end. My wife and friends just don’t get it!
Five things to consider when raising prices.
1) Have a roll-out strategy that gives customers options. Analyze the worst case scenario and prepare for it.
It appears that Netflix knows it will lose customers with its most recent price change. The business mentioned earlier underestimated the impact of a quiet price increase. Setup some pricing models, look at each larger customer individually, and decide if you will lose the business. Decide and don’t look back, but also watch what happens in the market, take a pulse maybe with shorter surveys after jobs go out to understand customers’ impression of the experience, watch your win/loss ratio on bids, and have an adjustment plan ready if needed.
2) Go overboard preparing and managing the communications strategy with your most profitable, loyal and largest-revenue customers.
Let’s look at each of these three scenarios separately:
a) Your most profitable customers may not be the biggest, but they are buying the services and products that make you the most money. It seems that Netflix looked at this and raised prices accordingly—so as not to tick off profitable customers, but instead tick off its lower end customers. At least it appears that’s what the company is doing out of the gate.
b) Have a plan for the top 20 percent of your customer base that generates 80 percent of your revenue. My guess is that Netflix looked into this and priced its lower end services knowing it would lose those customers.
c) Be careful not to tick off your loyal customers. Word of mouth and social networking sites can make or break you. In my opinion, Netflix has the biggest issue here. It had a very loyal customer base within the 22.8 million subscribers. Customers who have been with the service since day one feel betrayed; they feel the company is jacking up profits and no longer cares about the customer. These customers are magnifying their dissatisfaction across the Internet. I believe Netflix could have explained its reasons for the pricing strategy change better, but what do I know. I’m not a movie guy!
3) Don’t underestimate word of mouth.
Customers will share with others. Have a strategy for communicating to everyone and letting them know what is going on. It may not be a popular decision, but by showing the value-add and how you are justifying the higher prices, customers hopefully will understand. Have a public relations plan in place whether you are a small, $1 million shop or multimillion shop.
Netflix is being hammered right now across Facebook and Twitter, and hoping it can weather this storm. Assume that customers will notice the price increase and be proactive explaining the reason for them. Be visible with a consistent message.
4) Have integrity.
Prices will continue to go up. Bread is no longer a nickel, a gallon of gas is no longer $.35, and you can no longer buy a house for $3,000. Still, you must have integrity, a logical reason for raising prices and appreciate how the customer will react.
I will never forget my first customer service job. Our new, “turnaround expert” VP of sales came to me explaining that sales were way off and that I needed to double the price on a custom product we made for one of my customers. As a green-behind-the-ears 23-year-old, I said, “Okey Dokey Boss! I’ll do my best to be nice as I drop the bomb.”
I called the customer back with a $180,000 price instead of the normal $90,000. It went over like a lead balloon. The company had no other choice but to accept the price because we were the single source. Its buyer did say she would get even, felt betrayed and would proactively look for a second source. My employer was short sighted, I lost confidence in my employer, and I left within a year.
5) Try gradual price increases over time whenever possible.
The key is to have discipline in raising prices slowly whenever possible, or at least having a method to your madness. Also, be ready to explain the reasons for the price increases if you are asked.
Netflix has had two significant price increases in a year and customers noticed. I don’t fully understand why it couldn’t increase prices in small increments over time. I’m not a movie guy. Maybe the company doesn’t have the luxury just like the business I referenced above, but whenever possible you should try to keep your pricing up with inflation and rising costs, instead of waking up one day and noticing that you’re way out of whack and now need to get back in line with a singe huge adjustment.
The bottom line is to have integrity, be prepared with a plan, and be ready with a solid answer for customers. For small pricing changes, you may not need to broadcast them like Netflix, but be ready with an answer when asked. Train your sales people to be able to handle objections or attack it head on if you believe the increase will be noticed.
I hope this helps, and good luck with your price adjustment strategies.
