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Over the past 15 years, Netflix has built what is likely the most successful subscription service of all time.  Their users are incredibly engaged, fiercely loyal, and absolutely love the service.

However, despite this incredibly deep connection with their subscribers, users revolted when Netflix tried to dramatically increase their prices and fundamentally alter their suite of products.  Over the next 4 months, the company lost 800,000 subscribers and its stock price fell 77%.

Netflix logo

From Netflix’s perspective, the changes were a rational decision based on their growing popularity, increasing content costs, and desire to move away from physical DVDs and to more streaming content.

From the average subscriber’s perspective, the changes included a dramatic price hike (in some cases up to 60%!) executed in a very short period of time, and the elimination of a still-very-popular combination offering of DVDs and streaming content.

As small business owners know, pricing is a major decision often based on the costs of your product, the type of customers you are targeting, the geographical area you are located in, your competitors, and many other factors.

But what happens when you have to increase your prices?

How can you avoid falling into the “Netflix trap” and losing customers when you raise your prices or change product features?  We’ve put together a quick three-step plan that should be part of any price or product change to help guarantee that you minimize any negative effects that come with these types of changes.

1. Treat Your Current Customers Respectfully
One of the major mistakes Netflix made in 2011 was hiking prices for current subscribers only 2 months after their initial announcement.  Customers are generally very sensitive to dramatic changes and a fast-approaching 60% price hike is definitely scary.

When you are planning to raise your prices, make sure to consider your current customers.  If you sell your products as a subscription, try to guarantee your current customers a significant period of time at their current prices (6 months to 1 year is generally enough) before gradually increasing their cost.  Most customers understand that prices increase over time and are willing to pay more as long as the increase is gradual and in the future.

If you sell more traditional, non-subscription, products, make sure to engage your best customers and let them know why you need to increase prices; increased competition and rising costs are usually safe reasons.  Additionally, you may want to offer them a discount on a future order as a reward for their loyalty to your business and to lessen the initial impact of the increase.

2. Don’t Eliminate a Valuable Product

From the Netflix Blog (7/12/11):

“With this change, we will no longer offer a plan that includes both unlimited streaming and DVDs by mail”

This quote is a perfect example of one of the biggest mistakes Netflix made in their price and product restructuring.  In an effort to move to the future (streaming content) faster, they planned to eliminate a product that still had a very significant number of subscribers.

When making a pricing and product change, make sure you don’t make Netflix’s mistake.  If you want to eliminate one of your products or services, engage past customers who have bought the product or subscribed to the service.

Ask them if your new product (if there is one) or your remaining products will suit their needs.  If you overwhelmingly hear that the product you are planning to eliminate is still needed, reconsider your plans and try to determine a way to transition current customers more effectively to your new product.

Netflix Subscribers Added by Quarter

 Netflix customer loss chart

3. Offer Notice and Be Humble
Even if your business has experienced great success, as Netflix had until 2011, you should still plan to offer plenty of notice on price changes.  Pay close attention to how new customers react to the new prices: Do they purchase at a lower rate than before?  Does your product now appeal to a different segment of customers?  Are those customers collectively as valuable as your past set of customers?

After offering notice to customers, also make sure to remain humble.  One of Reed Hasting’s big mistakes as CEO of Netflix in 2011 was trying to “strong-arm” his customers with the price increases.  His no-turning-back attitude and lack of compassion for his subscribers quickly earned him the nickname “Greed Hastings”.

Netflix Learned From Their Mistakes

The story has a happy ending for Netflix.  After a dramatic fall from grace, they were able to rebuild their brand and again start growing their subscribers rapidly.  It also appears they have learned from their prior mistakes. On April 21st, 2014, Netflix announced a price increase, but they did it much more effectively than they previously had in 2011:

  • Existing subscribers would maintain their current monthly fee for 2 years
  • New subscribers would only pay $1 more per month
  • No dramatic change in product structure

By treating current customers fairly, keeping their products reasonably consistent, and offering adequate notice, the outcome of this change was much more positive, with shares climbing 6% on the day of the announcement.

Have you ever tried to change your prices?  How did your customers react and what did you learn from the process?  We’d love to hear!

About the Author: Alex Mitchell is a Product Manager at Webs focused on Site Optimization, Internationalization, Localization, and all other –ations. Find more from Alex on Google+.

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