Netflix Communication

Netflix In July, 2011, Netflix announced a price change that was around a 60% price hike. The company was essentially forced to do this because its costs were increasing.

In the early years of its business, Netflix had been able to secure rights to content at very low rates, but as the company grew, more rights holders wanted either to exercise those rights for themselves without competition or they wanted to earn more from the business that Netflix was doing, since Netflix was essentially killing off the DVD rental business that the rightsholders had previous earned high returns from.

This was the source of the cost increase for Netflix, and the company had to pass that along to the consumers. Netflix ran into problems with this, because they did a poor job of communicating the price increase to consumers. The other move that the company made in 2011 was to cleave off its DVD subscription business into "Qwikster," an unpopular move that was intended to split the business. Consumers, however, did not want two separate businesses and revolted.

The company was forced to backtrack on Qwikster, but had to maintain the higher price structure, because that was related to costs. From a communication perspective, Netflix's approach was interesting if nothing else. The company did not expend much energy explaining the price increase to consumers, instead choosing a justification stance, arguing in favor of their actions. When online outrage and cancelled subscriptions communicated clearly to Netflix that it was harming its business, it attempted an apology, but this was not backed by concrete action.

As a result, the company faced an even bigger backlash -- an insincere apology is perhaps the worst thing a company can do in terms of corporate communications. Eventually, Netflix did take action, cancelling the entire Qwikster plan. The company at that point had reverted to its old business model but with higher prices, so still faced a degree of customer dissatisfaction. Their handling of the issue -- failing to be conciliatory and legitimately recognize the anger from consumers -- came across as arrogance and that harmed their reputation.

This also alienated customers, because Netflix had previous built up a good reputation for customer service. The company would eventually cut the CEO's stock options, but leave the rest of its governance structure unchanged, despite the awful handling. It should be noted that Reed Hastings is one of the co-founders, so firing him would have been a challenge. The communication strategy was essentially a failure.

Netflix felt that it could implement a 60% price hike and dramatic restructuring of the customer experience with minimal communication with the customers -- this on the same Internet where Facebook can't tweak its layout without members having a fit. The tactics were weak from Netflix, and the strength of the backlash highlights this. The company's half-hearted apology and failure to admit the legitimacy of consumer complaints only exacerbated the problem. The company could have handled this issue better. First, it needed to take.